Climate Change, Trade, And Competitiveness

Climate Change, Trade, and Competitiveness Is a Collision Inevitable?

Editors

Lael Brainard and Isaac Sorkin

Brookings Trade Forum 2008 / 2009Brookings Trade Forum 2008 / 2009

For more than a decade, the Brookings

Trade Forum has provided comprehensive

analysis on current and emerging issues of

international trade and macroeconomics.

This timely issue focuses on one of the most pressing policy challenges of our day—

climate change—and its impact on international trade.

New climate change policies are likely to be developed and implemented in the next

few years. It is thus critically important to understand the interaction of international

trade and climate change policies both in terms of the role of border adjustments

in climate change policies and the role of international trade and investment in

facilitating mitigation and adaptation. And as policymakers strive toward a post-

2012 climate change framework, the success of the trading system in building a

relatively successful international institution might provide lessons for the climate

change system.

Contributors: Joseph E. Aldy, Resources for the Future • William Antholis,

Brookings • Jagdish Bhagwati, Columbia University and Council on Foreign Relations

• Jason Bordoff, Brookings • Nils Axel Braathen, OECD • Colin I. Bradford Jr.,

Brookings and Center for International Governance Innovation • Thomas L. Brewer,

Georgetown University • Daniel W. Drezner, Tufts University • Jeffrey A. Frankel,

Harvard University • (Tom) Hu Tao, Renmin University • Arik Levinson, Georgetown

University • Muthukumara Mani, World Bank • Warwick J. McKibbin, Brookings,

Lowy Institute, and Australian National University • C. Ford Runge, University of

Minnesota • Andrew W. Shoyer, Sidley Austin LLP • Peter J. Wilcoxen, Brookings

and Syracuse University

Lael Brainard served as vice president and director of the Brookings Institution’s

Global Economy and Development program, 2006–09. She has been nominated by

President Barack Obama to be under secretary of the U.S. Treasury for international affairs.

Isaac Sorkin is a research assistant for Brookings Global Economy and Development.


BROOKINGS INSTITUTION PRESSWashington, D.C.www.brookings.edu

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brookings institution press

Washington, D.C.

B R O O K I NG S TR A D E F O R U M 2 0 0 8 / 2 0 0 9

Lael BrainardIsaac Sorkin

editors

Climate Change, Trade,and Competitiveness

Is a Collision Inevitable?

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Copyright © 2009THE BROOKINGS INSTITUTION1775 Massachusetts Avenue, N.W., Washington, D.C. 20036

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Foreword vstrobe talbott

Editors’ Overview vii

1 warwick j. mckibbin and peter j. wilcoxenThe Economic and Environmental Effects of Border Tax Adjustments for Climate Policy 1Comments by Nils Axel Braathen, (Tom) Hu Tao, and Arik Levinson 24

2 jason e. bordoffInternational Trade Law and the Economics of Climate Policy:Evaluating the Legality and Effectiveness of Proposals to AddressCompetitiveness and Leakage Concerns 35Comment by Andrew W. Shoyer 60

3 jeffrey a. frankelAddressing the Leakage/Competitiveness Issue in Climate Change Policy Proposals 69Comment by Joseph E. Aldy 83

4 thomas l. brewerTechnology Transfers and Climate Change: International Flows, Barriers, and Frameworks 93Comment by Muthukumara Mani 114

5 william antholisFive “Gs”: Lessons from World Trade for Governing Global Climate Change 121

BROOKINGS TR ADE FORUM 2008 /2009

Climate Change, Trade, and Competitiveness

Is a Collision Inevitable?

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6 c. ford rungeThe Climate Commons and a Global Environmental Organization 139Comments by Colin I. Bradford Jr. and Daniel W. Drezner 156

7 jagdish bhagwatiReflections on Climate Change and Trade 171

Contributors 177

Index 185

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Foreword

This volume is the latest demonstration of the commitment by Brookings tocontribute in every possible and appropriate way to finding a solution to

the existential problem of climate change. The debate on this subject has shiftedfrom science to public policy. Though no consensus has emerged, it is clearthat addressing climate change effectively will require understanding the deepinteractions between it and other policy areas. Reaching an international agree-ment for meaningful global action will require diplomacy at the highest level.Sustaining lower levels of greenhouse gas emissions will require a new energyinfrastructure. And reducing emissions could end up reshaping almost everyaspect of nations’ domestic economies. Trade lies at the intersection of diplo-macy and economic policy, and hence will be implicated in a push for actionon climate change. Climate Change, Trade, and Competitiveness: Is a Colli-sion Inevitable? examines this interaction from the perspective of economics,law, and international relations. The contributors discuss the role of trade inmitigating the negative effects of climate change on domestic industries, in deter-mining the legality of climate change policy, and in reaching a global agreementon climate change. They lay out the complex decisions facing policymakersand make concrete suggestions for the path forward.

This volume, edited by Lael Brainard and Isaac Sorkin, includes papers byWilliam Antholis of the Brookings Institution, Jason Bordoff of Brookings,Thomas Brewer of Georgetown University, Jeffrey Frankel of Harvard Uni-versity, Warwick McKibbin of the Australian National University andBrookings, C. Ford Runge of the University of Minnesota, and Peter Wilcoxenof Brookings and Syracuse University. The volume includes comments byJoseph Aldy of Resources for the Future, Nils Axel Braathen of the Organiza-tion for Economic Cooperation and Development, Colin Bradford Jr. ofBrookings, Daniel Drezner of Tufts University, (Tom) Hu Tao of the State Envi-ronmental Protection Administration of China, Arik Levinson of GeorgetownUniversity, Muthukumara Mani of the World Bank, and Andrew Shoyer of Sid-ley Austin LLP. The volume also includes concluding reflections from Jagdish

v

S T R O B E T A L B O T T

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Bhagwati of Columbia University and the Council on Foreign Relations. Theinitial drafts of the papers, comments and reflections included in this volumewere delivered at a conference held in Washington in June 2008.

The editors wish to thank Alfred Imhoff for rapid and precise copyediting,and Janet Walker of the Brookings Institution Press for her work in bringingthe manuscript to publication. The authors remain responsible for the contentof their chapters, including any errors or omissions. Special thanks are also dueto Sandy Burke, Ann DeFabio Doyle, Kristie Latulippe, Anne Smith, and AmyWong, who made the conference and the book possible.

This book, like the conference, was made possible by the generous supportof the Doris Duke Charitable Foundation.

Strobe TalbottPresidentBrookings Institution

Washington, D.C.May 2009

vi Brookings Trade Forum 2008/2009

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vii

Editors’ Overview

Global climate change has leapt to the forefront of the public conscience.As policymakers grapple with the challenge of shaping policy to achieve

a domestic and international consensus, attention has turned to the role that trade- related measures could play. In both Europe and the United States, pol-icymakers have considered implementing so- called border adjustments ongoods coming from countries with few or no climate change policies. Thesepolicymakers argue that such measures would protect domestic firms from“unfair” competition abroad and provide a stick to discipline laggard countriesinto implementing their own climate change policies.

Although this “negative” agenda of trade- as- stick has garnered most of theattention in policy debates, a “positive” agenda at the nexus of trade and cli-mate change will be central in addressing the challenges posed by climatechange. Trade and investment flows will help spread the technology necessaryfor climate change mitigation and adaptation and provide the financing for nec-essary investments. And as policymakers strive toward a post-2012 climatechange framework, the success of the trading system in building a relativelysuccessful international institution might provide lessons for the climate changesystem.

Because new climate change policies will likely be developed and imple-mented in the next few years, it is important to understand the relationshipbetween climate change and the trading system, particularly whether it is desir-able to include trade- related measures in climate change policies. To that end,practitioners, academics, and policymakers convened in Washington on June9, 2008, to discuss these matters at a conference on climate change, trade, andcompetitiveness hosted by the Brookings Institution.

The chapters in this volume are revised versions of the papers presented atthis conference. Each chapter is followed by one or more comments offeredby the discussants at the conference. In chapter 1, Warwick McKibbin and PeterWilcoxen examine the size and effects of border adjustments that would beneeded to level the playing field if a carbon tax (or a carbon tax equivalent, like

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L A E L B R A I N A R DI S A A C S O R K I N

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viii Brookings Trade Forum 2008/2009

a cap- and- trade program) were put in place. Using their G- Cubed model of theworld economy, they consider the effects of imposing carbon taxes both withand without border adjustments. In their model, the border adjustment is basedon the carbon emissions associated with the production of each imported prod-uct, and the goal of the adjustment is to match the cost increase that would haveoccurred had the exporting country adopted a climate policy similar to that ofthe importing country. They analyze two cases. First, they examine what wouldhappen if Europe imposed a carbon tax and then implemented a border adjust-ment based on U.S. energy intensities. In the second case, they examine whatwould happen if the United States imposed a carbon tax and then implementeda border adjustment based on Chinese energy intensities. In both cases, theyfind that the tariffs would be very small on most traded goods, would eco-nomically harm the countries imposing them, and would produce little in theway of environmental benefits.

In chapter 2, Jason Bordoff combines economic and legal analysis to weighthe expected benefits of border adjustments against their potential harms. Con-sistent with the analysis in chapter 1, he argues that a border adjustment on carbon- intensive imports from certain countries, such as that proposed in the Lieberman- Warner Climate Security Act, would do little to reduce the smallamount of carbon leakage, although it would protect a few specific carbon- intensive domestic industries. He points out that there is also a risk that borderadjustments would be abused for purely protectionist reasons, lead to retalia-tory tit- for- tat trade wars, or be ruled noncompliant with the World TradeOrganization (WTO). Though the outcome of any complex legal question isdifficult to predict, Bordoff identifies several ways in which a border adjust-ment on carbon- intensive imports from countries without comparably effectiveclimate policies could be inconsistent with WTO law. He also looks at the freeallocation of allowances to compensate adversely affected industries and findsthat such measures are more likely to be compliant with WTO law only to theextent that they are mostly ineffective in protecting employment and output inadversely affected industries. He concludes that the expected costs of both bor-der adjustments and free allocation likely outweigh their benefits and suggestsalternative mechanisms to address climate change while mitigating leakage andadverse effects on workers in carbon- intensive sectors.

In chapter 3, Jeffrey Frankel examines how to design border measures tominimize the risk of being inconsistent with WTO jurisprudence. He arguesthat if the measures are designed sensibly, there need not be a conflict betweenenvironmentalists who want climate change policies to include leveling mech-anisms and free traders who want such policies to be nonprotectionist andconsistent with WTO law. He points to two precedents— the shrimp- turtle case

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Editors’ Overview ix

and the Montreal Protocol— that could justify border measures. On the basisof these, he suggests four principles for the design of border adjustments thatwould satisfy environmental and trade objectives. First, only countries partic-ipating in the Kyoto Protocol and/or its successors and following multilaterally agreed- on guidelines should use border measures, and then only against coun-tries that are not participating in international agreements. Second, measuresto address leakage to nonmembers should take the form of either tariffs or per-mit requirements on carbon- intensive imports. Third, independent panels ofexperts should be responsible for findings of fact, such as which countries arecomplying or not, which industries are involved and what is their carbon con-tent, which countries are entitled to respond with border measures, and the natureof the response. Finally, import penalties should target fossil fuels and theroughly half dozen most- energy- intensive major industries— aluminum,cement, steel, paper, and glass, and perhaps iron and chemicals.

In chapter 4, Thomas Brewer advocates an expansion of the internationalnegotiating agendas where climate change issues intersect trade and investmentissues. He shows that although the current negotiating agenda emphasizes North- South technology transfers and financial flows, developing countries aresources as well as recipients of international technology transfers, and thus heconcludes that the negotiating agenda should incorporate a more expansivegeography of technology flows. Because private trade and investment flows areorders of magnitude larger than official development assistance and the mainchannel through which technology transfer occurs, he argues, the negotiatingagenda should include a focus on the international institutional frameworksthat affect trade and investment flows— especially foreign direct investment— by looking at the institutions and official barriers that inhibit them. This approachhighlights the central role of multinational firms as both facilitators andinhibitors of technology transfers. As a result of his examination of the flowsand the barriers that can impede them, Brewer suggests an expanded interna-tional negotiating agenda, including the joint agenda of the post-2012 climatechange regime and the trade- investment regime.

In chapter 5, William Antholis takes up the question of what governance les-sons can be learned from the trading system for the climate change system. Heargues that the development of the General Agreement on Tariffs and Trade(GATT) / WTO system provides a road map for the development of confidencein a self- regulating system, which is what an effective climate change systemrequires. For him, the key features of the GATT/WTO system are that it builton a small group of states that, through a general agreement, were able to gearup domestic action over a generation and that also developed a mechanism tograduate nations when they emerge from the development process into the

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industrial world. He points out that the advantage of this five “Gs” approach isthat it does not pose a direct challenge to national sovereignty. Instead, it coor-dinates the work of states in a way that respects the diversity of local governanceand has a greater chance of gaining buy- in from the key players. He cautionsthat this approach does not guarantee fast domestic action, that many smallerstates will feel left out of the process, and that the transition to the system maybe difficult for many of these states.

In chapter 6, C. Ford Runge argues for the creation of a Global Environ-mental Organization (GEO). He points out that just as the GATT/WTO emergedfrom the postwar conferences as a rules- based response to increasing globalcommercial interdependence, multilateral responses to environmental chal-lenges reflect a growing recognition of nations’ pressing ecologicalinterdependence, particularly with respect to global climate change. He arguesthat there is a substantial institutional gap in the ability of governments torespond to global environmental issues like climate change and to address trade- related environmental measures that can only be filled by a separate bodylike a GEO. A GEO could also disentangle trade from environmental matters,allowing the WTO to focus on the expansion of market access and reductionsin trade protectionism. The WTO would need to pay attention to environmen-tal measures only in cases of obvious trade distortion, whereas a GEO couldhelp it clarify whether the environmental exceptions to the GATT articles arejustified. And a critical factor for a GEO’s success, Runge cautions, is that devel-oping countries would need to be certain that it represents their interests.

Finally, in chapter 7, Jagdish Bhagwati reflects on the themes of the vol-ume. He argues that unlike the GATT, which gave developing countriesmembership for free, no emissions reduction agreement would be effective with-out the full participation of developing countries. However, the stick of borderadjustments is the wrong way to encourage developing country participation.Instead, the developed world should compensate the developing world for his-toric emissions in exchange for their participation in emissions reduction goingforward. And regardless of the legal merits of border adjustments, Bhagwatirecommends that the United States avoid popularizing them because of the chaosthey might introduce into the international trading system.

x Brookings Trade Forum 2008/2009

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The Economic and Environmental Effects of Border Tax Adjustments for Climate Policy

For the foreseeable future, climate change policy will be considerably morestringent in some countries than in others. Indeed, the United Nations

Framework Convention on Climate Change explicitly states that developedcountries must take meaningful action before any obligations are to be placedon developing countries.

However, differences in climate policy will lead to differences in energy costs,and to concerns about competitive advantage. In high- cost countries, there willbe political pressure to impose border tax adjustments (BTAs), or “green tar-iffs,” on imports from countries with little or no climate policy and low energycosts. The BTAs would be based on the carbon emissions associated with theproduction of each imported product, and they would be intended to match thecost increase that would have occurred had the exporting country adopted aclimate policy similar to that of the importing country.

Several justifications have been proposed for including BTAs as a key com-ponent of climate policy. Some researchers— including Stiglitz, Kopp and Pizer,and Ismer and Neuhoff— argue that BTAs are required for economic efficiencyin carbon abatement.1 An alternative argument is that BTAs are needed to keepclimate policy from being undermined by the “leakage” of emissions throughmigration of carbon- intensive industries to low- tax countries and, as a corol-lary, to protect import- competing industries in high- tax countries.2 There arealso a number of papers that argue that the approach could be used to punishcountries that did not participate in the Kyoto Protocol, or could be used as athreat to encourage recalcitrant countries to join a global regime.3 Finally, there

1

W A R W I C K J . M C K I B B I NP E T E R J . W I L C O X E N 1

The authors thank Nils Axel Braathen, Lael Brainard, Isaac Sorkin, and participants in the con-ference where this chapter was first presented for helpful comments.

1. See Stiglitz (2006); Kopp and Pizer (2007); Ismer and Neuhoff (2007).2. For example, see Goh (2004); Hoerner (1998); Demailly and Quirion (2006); Babiker and

Rutherford (2005).3. For example, see Brack, Grubb, and Windram (2000); Hontelez (2007); and the discussion

in Charnovitz (2003).

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is also a considerable literature debating the legality of BTAs for climate policesunder World Trade Organization rules.4

These arguments are reflected in the political debate in Europe and theUnited States. In 2006 then–French prime minister Dominique de Villepin sug-gested that countries that do not join a post-2012 international treaty on climatechange should face additional tariffs on their industrial exports. The EuropeanParliament’s (2005/2049) resolution was focused on penalizing countries suchas the United States for nonparticipation in the Kyoto Protocol. In the UnitedStates, both the Bingaman- Specter Bill (S 1766) and the Leiberman- WarnerBill (S 2191) include mechanisms that would, in effect, impose BTAs undersome circumstances for imported goods from countries deemed to be makinginsufficient effort to reduce their greenhouse gas emissions.5

Most of the arguments in the literature, however, have been theoretical. Lit-tle empirical work has been done to determine either the magnitude that BTAswould take in practice, or on the economic and environmental consequencesthey would cause. This gap leads to a range of important questions. Would BTAsactually improve global carbon abatement? How much would they help or hurtthe economy of the country imposing them? How much would they help orhurt the global economy? Are the gains, if any, large enough to justify the admin-istrative costs involved? In this chapter, we address several of these questions.We estimate how large such tariffs would be in practice,6 and then examinetheir economic and environmental effects using G- Cubed, a detailed multisector,multicountry model of the world economy. 7 We find that the tariffs would besmall on most traded goods, would reduce leakage of emissions reduction verymodestly, and would do little to protect import- competing industries. We con-clude that the benefits produced by BTAs would be too small to justify theiradministrative complexity or their deleterious effects on international trade andthe potentially damaging consequences for the robustness of the global trad-ing system.8

In a sense, these results are not surprising, because most carbon emissionsare from domestic activities, such as electricity generation and local and regional

2 Brookings Trade Forum: 2008/2009

4. See Biermann and Brohm (2005); Brewer (2008); Frankel (2005); Goh (2004); Hoerner(1998).

5. See the discussion in Brewer (2008).6. This chapter focuses only on import adjustment. For a discussion of the problems that arise

with adjustment to exports in order to maintain competitiveness, see Pearce and McKibbin (2007).7. Other studies, such as Levinson and Taylor (2008), have used an econometric approach to

examine a related issue, the “pollution haven hypothesis,” to determine whether differences in his-torical environmental regulation have caused industries to migrate between countries. Our results,which examine prospective regulations using an econometrically estimated structural model andsimulation analysis, produces results that are broadly consistent with that literature.

8. These results of the damaging effect on trade are also found in Droge and Kemfert (2005).

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transportation, which are largely nontraded and are little affected by interna-tional trade.9 In practice, the most important mechanism through which leakagecould occur would be world oil markets, not trade in manufactured goods. Asufficiently large carbon tax imposed in a major economy would lower globaloil prices and lead to higher consumption in countries with little or no carbontax. However, BTAs would be neither appropriate nor effective in reducing thatform of leakage. We conclude that it is an unnecessary distraction for the globalcommunity to focus much attention on negotiations over BTAs as a compo-nent of climate policy; they would not matter much in practice and, as alsoargued by Lockwood and Whalley, they may lead to greater distortions to theglobal trading system.10

An Overview of the G- Cubed Model

G- Cubed is an econometric intertemporal general equilibrium model of theworld economy with regional disaggregation and sectoral detail. For this chap-ter, the world economy is divided into the ten regions shown in table 1-1. Eachregion is further decomposed into a household sector, a government sector, afinancial sector, the twelve industrial sectors shown in table 1-2, and a capital- goods- producing sector. To facilitate the analysis of energy and environmentalpolicy, five of the industries are used to represent segments of the energy indus-try: electric utilities, natural gas utilities, petroleum refining, coal mining, andcrude oil and gas extraction. All regions are linked through bilateral trade ingoods and financial assets. All relevant budget constraints are imposed onhouseholds, governments, and nations (the latter through accumulations of for-eign debt). Households and firms have forward- looking expectations and usethose projections when planning consumption and investment decisions. How-ever, a portion of the households and firms are assumed to be liquidityconstrained. G- Cubed is a very large example of the dynamic stochastic gen-eral equilibrium models used in the macroeconomics literature. It is also anintertemporal general equilibrium model from the computable general equi-librium class of models. We have described G- Cubed’s theoretical and empiricalstructure in more detail elsewhere.11 In the remainder of this section, we pre -sent a brief summary of its key features.

Warwick J. McKibbin and Peter J. Wilcoxen 3

9. This point on the scale of leakage was made in McKibbin and Wilcoxen (1997).10. Lockwood and Whalley (2008).11. McKibbin and Wilcoxen (1998).

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Producer Behavior

Each producing sector in each region is modeled by a representative firm,which chooses its inputs and its level of investment to maximize its stock mar-ket value subject to a multiple- input constant elasticity of substitutionproduction function and a vector of prices it takes to be exogenous. We assumethat output is produced using inputs of capital, labor, energy, and materials.Energy and materials, in turn, are aggregates of inputs of intermediate goodsand services.

We assume that all regions share production methods that differ in first- orderproperties but have identical second- order characteristics. This is intermediatebetween the extremes of assuming that the regions share common technolo-gies and of allowing the technologies to differ across regions in arbitrary ways.12

Finally, the regions also differ in their endowments of primary factors and pat-terns of final demands.

Maximizing the firm’s short- run profit subject to its capital stock and its pro-duction function gives the firm’s factor demand equations. At this point, we


12. We adopt this approach because estimation of the second-order parameters requires a timeseries of input/output tables. Outside OECD countries there are generally too few tables availableto permit the coefficients to be estimated separately for each country.

Table 1-1. Regions in the G-Cubed Model

1 United States2 Japan3 Australia4 Europe5 Other members of Organization for Economic Cooperation and Development (OECD)6 China7 India8 Other developing countries (LDCs)9 Eastern Europe and the former USSR (EEFSU)10 Oil-exporting developing countries (members of the Organization of the Petroleum

Exporting Countries, OPEC)

Table 1-2. Industrial Sectors in the G-Cubed Model

1 Electric utilities 7 Agriculture2 Gas utilities 8 Forestry and wood products3 Petroleum refining 9 Durable goods4 Coal mining 10 Nondurables5 Crude oil and gas extraction 11 Transportation6 Other mining 12 Services

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add two further levels of detail: We assume that domestic and imported inputsof a given commodity are imperfect substitutes, and that imported productsfrom different countries are imperfect substitutes for each other. Thus, the finaldecision the firm must make is the fraction of each of its inputs to buy fromeach region in the model (including the firm’s home country). We assume thatall agents in each economy have identical preferences over foreign and domes-tic varieties of each particular commodity.13 The result is a system of demandequations for domestic goods and imports from every region.

In addition to buying inputs and producing output, each sector must alsochoose its level of investment. We assume that capital is specific to each sec-tor, that investment is subject to adjustment costs, and that firms choose theirinvestment paths to maximize their market value. In addition, each industryfaces the usual constraint on its accumulation of capital that the change in thecapital stock is equal to gross investment less depreciation.

Following the cost of adjustment models of Lucas, Treadway, and Uzawa,we assume that the investment process is subject to rising marginal costs ofinstallation.14 Setting up and solving the firm’s investment problem yields aninvestment decision that depends on production parameters, taxes, the currentcapital stock, and marginal q (that is, the ratio of the marginal value of a unitof capital to its purchase price).

Following Hayashi, we modify the investment function to improve its empir-ical properties by writing it as a function not only of q but also of the firm’scurrent capital income.15 This improves the empirical behavior of the specifi-cation and is consistent with the existence of firms that are unable to borrowand therefore invest purely out of retained earnings. The fraction of fully opti-mizing firms is taken to be 0.3 based on a range of empirical estimates;16 thefraction that are liquidity constrained is 0.7.

In addition to the twelve industries discussed above, the model also includesa special sector that produces capital goods. This sector supplies the new invest-ment goods demanded by other industries. Like other industries, the investmentsector demands labor and capital services as well as intermediate inputs. Werepresent its behavior using a nested constant elasticity of substitution pro-duction function with the same structure as that used for the other sectors.However, we estimate the parameters of this function from price and quantitydata for the final demand column for investment.


13. Anything else would require time-series data on imports of products from each country oforigin to each industry, which is not only unavailable but difficult to imagine collecting.

14. Lucas (1967); Treadway (1969); Uzawa (1969).15. Hayashi (1979).16. These empirical estimates are reported by McKibbin and Sachs (1991).

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Households and Governments

Households consume a basket of composite goods and services in everyperiod and also demand labor and capital services. Household capital servicesconsist of the service flows of consumer durables and residential housing.Households receive income by providing labor services to firms and the gov-ernment, and from holding financial assets. In addition, they receive imputedincome from ownership of durables and housing, and they also receive trans-fers from their region’s government.

Within each region, we assume household behavior can be modeled by arepresentative agent who maximizes an intertemporal utility function subjectto the constraint that the present value of consumption is equal to the sum ofhuman wealth and initial financial assets. Human wealth is the present valueof the future stream of after- tax labor income and transfer payments receivedby households. Financial wealth is the sum of real money balances, real gov-ernment bonds in the hands of the public,17 net holdings of claims against foreignresidents, and the value of capital in each sector.

There has, however, been considerable debate about whether the actualbehavior of aggregate consumption is consistent with the permanent incomemodel.18 On the basis of the evidence cited by Campbell and Mankiw,19 wemodify the basic household model described above to allow a portion of house-hold consumption to depend entirely on current after- tax income (rather thanon wealth). This could be interpreted in various ways, including the presenceof liquidityconstrained households or households with myopic expectations.For the purposes of this chapter, we will not adopt any particular explanationand will simply take the income- driven share of consumption to be an exoge-nous constant. Following McKibbin and Sachs, we take the share to be 0.7 inall regions.20

Within each period, the household allocates expenditures among goods andservices to maximize its intratemporal utility. In this version of the model, weassume that intratemporal utility may be represented by a Cobb- Douglas func-tion of goods and services.21 Finally, the supply of household capital servicesis determined by consumers themselves, who invest in household capital. We


17. Ricardian neutrality does not hold in this model because some consumers are liquidity-constrained.

18. Some of the key papers in this debate are Hall (1978); Flavin (1981); Hayashi (1982); andCampbell and Mankiw (1990).

19. Campbell and Mankiw (1990).20. McKibbin and Sachs (1991). Our income-driven faction is somewhat higher than Camp-

bell and Mankiw’s estimate of 0.5.21. This specification has the undesirable effect of imposing unitary income and price elasticities.

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assume that households choose their level of investment to maximize the pres-ent value of future household capital service flows (taken to be proportional tothe household capital stock), and that investment in household capital is sub-ject to adjustment costs. In other words, the household investment decision issymmetrical with that of the firms.

Government

We take each region’s real government spending on goods and services tobe exogenous and assume that it is allocated among final goods, services, andlabor in fixed proportions according to the base year input/output table for eachregion. Total government spending includes purchases of goods and servicesplus interest payments on government debt, investment tax credits, and trans-fers to households. Government revenue comes from sales, corporate, andpersonal income taxes and from the issuance of government debt. In addition,there can be taxes on externalities such as carbon dioxide emissions. We assumethat agents will not hold government bonds unless they expect the bonds to beserviced. Accordingly, we impose a transversality condition on the accumula-tion of public debt in each region that has the effect of causing the stock of debtat each point in time to be equal to the present value of all future budget sur-pluses from that time forward. This condition alone, however, is insufficient todetermine the time path of future surpluses: The government could pay off thedebt by briefly raising taxes a lot; it could permanently raise taxes a smallamount; or it could use some other policy. We assume that the government leviesa lump sum tax in each period equal to the value of interest payments on theoutstanding debt. In effect, therefore, any increase in government debt isfinanced by Consols (that is, bonds without a redemption date that pay inter-est in perpetuity), and future taxes are raised enough to accommodate theincreased interest costs. Thus, any increase in the debt will be matched by anequal present value increase in future budget surpluses.

Macroeconomic Features: Labor Market Equilibrium and Money Demand

We assume that labor is perfectly mobile among sectors within each regionbut is immobile between regions. Thus, within each region, wages will be equalacross sectors. The nominal wage is assumed to adjust slowly according to anoverlapping contracts model, where nominal wages are set based on currentand expected inflation and on labor demand relative to labor supply. In the longrun, labor supply is given by the exogenous rate of population growth; but inthe short run, the hours worked can fluctuate depending on the demand for labor.


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For a given nominal wage, the demand for labor will determine short- run unem-ployment.

Relative to other general equilibrium models, this specification is unusualin allowing for involuntary unemployment. We adopted this approach becausewe are particularly interested in the transition dynamics of the world economy.The alternative of assuming that all economies are always at full employment,which might be fine for a longrun model, is clearly inappropriate during thefirst few years after a shock.

Finally, because our wage equation depends on the rate of expected infla-tion, we need to include money demand and supply in the model. We assumethat money demand arises from the need to carry out transactions and dependspositively on aggregate output and negatively on the interest rate. The supplyof money is determined by the balance sheet of the central bank and is exogenous.

International Trade and Asset Flows

The regions in the model are linked by flows of goods and assets. Each coun-try’s exports are differentiated from those of other countries; exports of durablesfrom Japan, for example, are not perfect substitutes for exports of durables fromEurope. Each region may import each of the twelve goods from potentially allthe other regions. In terms of the way international trade data are often expressed,our model endogenously generates a set of twelve bilateral trade matrices, onefor each good. The values in these matrices are determined by the importdemands generated within each region.

Trade imbalances are financed by flows of assets between countries. Weassume that asset markets are perfectly integrated across the regions and thatfinancial capital is freely mobile.22 Under this assumption, expected returns onloans denominated in the currencies of the various regions must be equalizedperiod to period according to a set of interest arbitrage relations. In generatingthe baseline of the model, we allow for risk premiums on the assets of alter-native currencies, although in counterfactual simulations of the model, theserisk premiums are generally assumed to be constant and unaffected by the shockswe consider.


22. The mobility of international capital is a subject of considerable debate; see Gordon andBovenberg (1996) or Feldstein and Horioka (1980). Also, this assumption should not be confusedwith our treatment of physical capital, which we assume to be specific to sectors and regions andhence completely immobile. The consequence of assuming mobile financial capital and immobilephysical capital is that there can be windfall gains and losses to owners of physical capital. Forexample, if a shock adversely affects profits in a particular industry, the physical capital stock inthat sector will initially be unaffected. Its value, however, will immediately drop by enough tobring the rate of return in that sector back into equilibrium with that in the rest of the economy.

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For all regions other than China, we assume that exchange rates are free tofloat and that financial capital is freely mobile. This may appear less plausiblefor developing countries than it does for countries that belong to the Organi-zation for Economic Cooperation and Development (OECD), because manydeveloping countries have restrictions on short- term flows of financial capital.However, the capital flows in our model are the sum of short- term portfolioinvestment and foreign direct investment, and the latter is usually subject tofewer restrictions. In many countries with constraints on financial instruments,there are large flows of direct foreign investment responding to changes inexpected rates of return. We assume that China pegs its exchange rate to thedollar, with a slight adjustment for deviations in output growth from trend andactual inflation from the desired target rate. This is closer to the recent histor-ical record than the alternative assumptions of floating exchange rates or exactlyfixed exchange rates.

Calculating the Carbon Content of Traded Goods

In general, BTAs are used to compensate for differences between countriesin the taxes levied on goods, such as excise taxes or value- added taxes. Export-ing countries may exempt traded goods from such taxes, or rebate taxes alreadycollected, and importing countries may impose taxes equivalent to what wouldhave been charged had the product been produced domestically. In this chap-ter, we examine only adjustments on imports and assume that carbon taxes arenot rebated on exports. However, our methodology could be applied to exportrebates as well.

The first step in computing a carbontax BTA on a given import would beto determine the total amount of fossil energy that was used directly or indi-rectly in the production of the good. Measuring direct energy consumption isrelatively straightforward; an aircraft, for example, requires the direct use ofenergy when it is assembled. However, energy is also used indirectly throughthe production of all the parts and materials from which the plane is made.Computing total indirect energy consumption requires following the value- added chain back through intermediate products at every stage: Energy is usedto produce sheet metal from aluminum; to produce aluminum from bauxite;and to mine the bauxite itself.

Tracing energy consumption all the way back to raw materials is possibleusing input/output tables. An input/output “use” table is a matrix showing theflow of each good to each industry in a particular year. Using that information,it is possible to determine the amount of each input needed to make a single


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unit of output. If A is a matrix of such coefficients, with one row for each inputand one column for each output, the set of market equilibria for the inputs canbe summarized in equation 1, where X is a vector of gross outputs by com-modity, and F is a vector of final demands:

AX + F = X (1)

The left side is total demand for each product: AX is the demand for intermediategoods, and F is final demand. The right side, X, is the supply of each good. Solv-ing for X gives the total input needed to produce any given final demand vector:

X = (I – A)-1F (2)

Matrix (I – A)-1 is known as a “total requirements” table. Each row corre-sponds to an input and each column to an output, and each element shows theamount of the input used directly or indirectly in the production of one unit ofthe output. For example, the total amount of coal consumption that can be attrib-uted to production of a durable good would appear as an element in the coalrow and durable goods column of (I – A)-1.

Computing the implicit carbon content of each product requires two addi-tional steps: The inputs of each fossil fuel are multiplied by appropriateemissions coefficients to convert fuel consumption to carbon emissions, andthen carbon emissions are summed across fuels. The result is a single coeffi-cient for each good giving the total carbon emissions that can be attributed tothe good’s production.

Because input/output tables are used in the construction of G- Cubed, theinformation needed to compute a total requirements table for each region inthe model was readily available. In addition, the model’s database includes emis-sions coefficients for each fuel, with emissions in millions of metric tons ofcarbon for each of the model’s units of fuel, so the final steps were straight-forward as well. Carrying out the calculation produced the results are shownin table 1-3. For convenience, the results are shown as thousands of metric tons.As indicated in the lower rows of the table, production of nonfuel traded goodsgenerally involves emissions of 0.1 to 1.1 thousand metric tons per model unitof output. (The model’s output units are large, corresponding to billions of dol-lars of output in a base year.) For example, one unit of durable goods producedin the United States is associated with 0.13 thousand metric tons of carbon.Implicit emissions vary strongly across regions; emissions associated withdurables are only 0.7 thousand metric tons per unit in Japan, but are 1.01 thou-sand tons per unit in China. As expected, Japan and Europe are most efficientin terms of carbon and have the lowest coefficients; the highest coefficients areassociated with China, India, and Eastern Europe and the former Soviet Union.


01-0298-6 ch01:Layout 1 7/29/09 9:58 AM Page 10

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01-0298-6 ch01:Layout 1 7/29/09 9:58 AM Page 11

Carbon Taxes with and without Border Tax Adjustments

This section describes the simulations we ran using the G- Cubed model toexplore the effects of BTAs. We began by constructing a hypothetical carbontax beginning at $20 per metric ton of carbon dioxide and rising by $0.50 peryear to $40. The tax was intended to illustrate the effect of BTAs over a rangeof carbon prices but was not designed to achieve any specific emissions target.Our results would apply to a tradable permit policy as well, if the policy hadsimilar equilibrium permit prices. However, administering the BTAs would bemuch more difficult under a permit system, because frequent revisions wouldbe needed to follow fluctuations in the permit price.

We then examined the effects of the carbon tax under four scenarios aboutits implementation: (1) It is adopted in Europe without BTAs (referred to inthe tables below as “EU- Tax”); (2) it is adopted in Europe, and BTAs areimposed on imports to Europe, assuming that the carbon embodied in theimports matches the energy intensity of the United States ( “EU- TaxAdj”); (3)the tax is adopted in the United States without BTAs ( “US- Tax”); and (4) it isadopted in the United States, and BTAs are imposed based on the energy inten-sity of China ( “US- TaxAdj”). These simulations, which are descriptivelysummarized in table 1-4, were chosen to contrast the effects of BTAs betweencountries with similar and relatively efficient technology, Europe and the UnitedStates, with the effects of BTAs between countries with more heterogeneoustechnology, the United States and China.

In all four simulations, additional government revenue generated by theBTAs and the carbon tax itself was used to finance additional governmentspending in the corresponding region (that is, each region’s fiscal deficit washeld constant). Other fiscal assumptions could be used instead; for example,the revenue could be used to lower the deficit, or it could be returned to house-holds via a lump- sum rebate.

The BTAs were computed by multiplying the embodied carbon per unit ofoutput by the carbon tax prevailing in each year, and then converting the result


Table 1-4. Carbon Tax and Border Tax Adjustment Simulations

Name Description

EU-Tax European carbon tax without BTAsEU-TaxAdj European integrated carbon tax and BTA policyUS-Tax U.S. carbon tax without BTAsUS-TaxAdj U.S. integrated carbon tax and BTA policy

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to an ad valorem rate.23 No adjustments were applied to imports of coal andcrude petroleum, which are already subject to the carbon tax, which was appliedto imports as well as domestic production. The results are shown in tables 1-5and 1-6 for two carbon tax rates: $20 and $40 per ton. For the European tariffsshown in table 1-5, the rates for the $20 tax are small: less than 1 percent fortradable goods other than fuels. The rates for the $40 tax are twice as large, butstill small; the largest are the tax on nondurables, at 0.92 percent, and on trans-portation, at 0.88 percent. For the U.S. tariffs shown in table 1-6, the rates areconsiderably higher. When the carbon tax is $20 per ton, the effective tariffson durable and nondurable manufactured goods are almost 2 percent. At the$40 per ton rate, the tariffs double to slightly less than 4 percent. The rates intable 1-6 reflect the higher energy intensity of Chinese manufacturing, as wasshown in table 1-3.

The effects of the two European scenarios on real gross domestic product(GDP) are shown in table 1-7. The carbon tax lowers European GDP by 0.6 to0.7 percent. Lower European GDP, in turn, lowers GDP in Eastern Europe andthe former Soviet Union (EEFSU) by 0.1 to 0.2 percent. OPEC’s GDP alsofalls slightly, but the remaining countries and regions are affected by less than0.1 percent. Adding BTAs has little additional effect on the European GDP,which is still reduced by 0.6 to 0.7 percent. However, the GDP of the EEFSUregion drops considerably more than under the carbon tax alone: 0.5 to 0.7 per-cent. In part, this is due to the increase in trade barriers between Europe andthe EEFSU; even though the BTA rates are calculated based on U.S. energyintensities, in this simulation they are applied to European imports.

The effects of the policies on annual carbon emissions from each region areshown in table 1-8. The carbon tax alone lowers European emissions by 53 to98 million metric tons (mmt) per year over the 2010–30 period. Some of theseemissions are offset by increases in other regions, often referred to as “leak-age.” In 2010, for example, European emissions fall by 53 mmt but worldemissions fall by only 48 mmt. The difference is 5 mmt, or about 10 percentof the European decrease: 2 mmt in the United States, 1 mmt in developingcountries, and 2 mmt in EEFSU. Adding BTAs causes a larger reduction inworldwide emissions: 69 to 127 mmt annually over the period. The larger cutsare the result of three interacting effects: European emissions do not fall asmuch (49 to 91 mmt), there is no leakage of emissions to the United States or less- developed countries, and the EEFSU’s emissions fall by much more dueto the much larger drop in the EEFSU’s GDP.


23. The conversion to an ad valorem rate was for convenience; in practice, it is likely that aunit tax would be used.

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Table 1-9 shows the effects of the two policies on short- run interest rates ineach region. Both policies lower the return to capital in Europe, and to a lesserextent, the EEFSU. The changes in interest rates in other regions are generallyvery small. Lower rates of return in Europe and the EEFSU lead to capital out-flows and shifts of the two regions’ trade and current account balances towardsurplus, as shown in tables 1-10 and 1-11. The capital flows to the remainingregions in the model, which generally see their trade and current accounts shift


Table 1-5. Simulated European Border Tax Adjustments Based on U.S. Energy Intensity

Percentage point change in ad valorem tariff

$20 per ton $40 per tonSector carbon tax carbon tax

Electric utilities 5.30 10.60Gas utilities 0.82 1.64Petroleum refining 13.18 26.36Coal N.A. N.A.Crude oil N.A. N.A.Mining 0.54 1.08Agriculture 0.34 0.68Forestry and wood 0.26 0.52Durables 0.26 0.52Nondurables 0.46 0.92Transportation 0.44 0.88Services 0.10 0.20

Source: Authors’ calculations.Note: N.A. = not applicable.

Table 1-6. Simulated U.S. Border Tax Adjustments Based on China’s Energy Intensity

Percentage point change in ad valorem tariff

$20 per ton $40 per tonSector carbon tax carbon tax

Electric utilities 15.26 30.52Gas utilities 23.36 46.72Petroleum refining 14.76 29.52Coal N.A. N.A.Crude oil N.A. N.A.Mining 1.62 3.24Agriculture 0.94 1.88Forestry and wood 1.22 2.44Durables 1.94 3.88Nondurables 1.84 3.68Transportation 1.74 3.48Services 1.18 2.36

Source: Authors’ calculations.Note: N.A. = not applicable.

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toward deficit. The euro strengthens slightly relative to the dollar, as shown intable 1-12. Exchange rates in the model are dollars per unit of foreign currency.An appreciation of the euro relative to the dollar, therefore, appears in the tableas a percentage increase in the exchange rate for Europe.

The effects of the policies on European prices and domestic output areshown in table 1-13. The carbon tax policy, shown in the top section of the


Table 1-7. Simulated Effects of European Policies on Real Gross Domestic Product,2010, 2020, and 2030

Percentage changes from values for business as usual

EU-Tax EU-TaxAdj

Country or Group 2010 2020 2030 2010 2020 2030

United States 0.0 0.0 0.0 0.0 0.0 0.0Japan 0.0 0.0 0.0 0.0 0.0 0.0Australia 0.0 0.0 0.0 0.0 0.0 0.0Europe –0.7 –0.6 –0.7 –0.7 –0.6 –0.7Other OECD members 0.0 0.0 0.0 0.0 0.0 0.0China 0.0 0.0 0.0 0.0 0.0 0.0India 0.0 0.0 0.0 0.0 0.0 0.0Less-developed countries 0.0 0.0 0.0 0.0 0.0 0.0EEFSU –0.2 –0.1 –0.1 –0.7 –0.5 –0.5OPEC –0.1 –0.1 –0.1 –0.2 –0.2 –0.2

Source: Authors’ simulations.Note: OECD = Organization for Economic Cooperation and Development; EEFSU = Eastern Europe and the former USSR;

OPEC = Organization of the Petroleum Exporting Countries.

Table 1-8. Simulated Effects of European Policies on Carbon Emissions, 2010, 2020, and 2030

Millions of metric tons

EU-Tax EU-TaxAdj

Country or Group 2010 2020 2030 2010 2020 2030

United States 2 2 2 0 0 0Japan 0 0 0 0 0 0Australia 0 0 0 0 0 0Europe –53 –72 –98 –49 –66 –91Other OECD members 0 0 0 0 0 0China 0 0 0 0 –1 –1India 0 0 0 0 0 0Less-developed countries 1 2 2 –1 –1 –1EEFSU 2 3 5 –18 –24 –32OPEC 0 0 0 –1 –2 –2Total –48 –64 –88 –69 –93 –127



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table, raises coal prices sharply: by 23 percent in 2010, rising to 33 percent in2030. Coal output drops by 8 percent in 2010, rising to 13 percent in 2030.Other energy prices, including the natural gas price, rise as well, although bymuch smaller percentages: 5 to 6 percent for crude oil and refined petroleum,and 1 to 2 percent for electricity. The combined tax and BTA policy shown inthe bottom of the table is very similar, but with slightly larger increases in mostprices (due to the tariffs) and slightly smaller reductions in output (due to the


Table 1-9. Simulated Effects of European Policies on Short-Run Interest Rates, 2010,2020, and 2030

Percentage point change

EU-Tax EU-TaxAdj

Country or Group 2010 2020 2030 2010 2020 2030

United States –0.01 –0.01 –0.01 –0.01 –0.01 –0.01Japan –0.01 –0.01 –0.01 –0.02 –0.01 –0.01Australia –0.01 –0.01 –0.01 –0.02 –0.01 –0.01Europe –0.04 –0.03 –0.04 –0.05 –0.04 –0.05Other OECD members –0.01 –0.01 –0.01 –0.02 –0.01 –0.02China –0.02 –0.01 –0.01 –0.02 –0.01 –0.01India –0.01 –0.01 –0.01 –0.01 –0.01 –0.01Less-developed countries –0.02 –0.01 –0.01 –0.02 –0.01 –0.02EEFSU –0.03 –0.01 –0.02 –0.03 –0.02 –0.02OPEC –0.01 –0.01 –0.01 –0.01 –0.01 –0.01



Table 1-10. Simulated Effects of European Policies on Trade Balances, 2010, 2020, and 2030

Billions of dollars

EU-Tax EU-TaxAdjCountry or Group 2010 2020 2030 2010 2020 2030

United States –2.1 –0.6 0.1 –2.1 –0.4 0.6Japan –1.0 –0.3 –0.1 –1.2 –0.4 –0.2Australia 0.0 0.0 0.0 0.0 0.0 0.0Europe 5.5 1.6 0.4 4.7 1.9 1.4Other OECD members –0.1 0.0 0.0 –0.1 0.0 0.1China –0.5 –0.2 –0.1 –0.6 –0.2 –0.1India –0.2 –0.1 0.0 –0.2 –0.1 –0.1Less-developed countries –1.3 –0.2 0.0 –1.2 –0.3 0.0EEFSU 0.0 0.1 0.0 1.3 0.5 –0.2OPEC 0.0 0.0 0.1 0.1 0.0 0.1



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shift away from imports to domestic production). However, the protective effectof the adjustments for European producers is very small, typically raising out-put by only 0.1 percent relative to the carbon tax alone.

Tables 1-14 through 1-20 show the effects of the two U.S. policies on thesame set of variables. In general, the effects of the carbon tax are similar inmagnitude but with the United States and the region representing other OECDmembers (which includes Canada and Mexico) filling the roles of Europe and


Table 1-11. Simulated Effects of European Policies on Current Accounts, 2010, 2020,and 2030

Billions of dollars

EU-Tax EU-TaxAdj

Country or Group 2010 2020 2030 2010 2020 2030

United States –3.0 –2.7 –3.4 –3.1 –2.9 –3.7Japan –1.6 –1.3 –1.7 –1.9 –1.7 –2.2Australia 0.0 0.0 0.0 0.0 0.0 0.0Europe 7.9 6.7 8.6 6.5 6.1 8.5Other OECD members –0.3 –0.3 –0.3 –0.3 –0.2 –0.3China –0.7 –0.6 –0.7 –0.9 –0.7 –1.0India –0.2 –0.2 –0.3 –0.3 –0.3 –0.4Less-developed countries –1.9 –1.4 –1.7 –1.7 –1.4 –1.8EEFSU 0.0 0.2 0.1 1.9 1.9 2.0OPEC –0.1 –0.1 –0.1 0.1 0.1 0.0



Table 1-12. Simulated Effects of European Policies on Real Exchange Rates, 2010, 2020,and 2030


EU-Tax EU-TaxAdj

Country or Group 2010 2020 2030 2010 2020 2030

United States — — — — — —Japan –0.1 –0.1 –0.1 –0.1 0.0 0.0Australia –0.1 –0.1 –0.1 –0.1 –0.1 –0.1Europe 0.5 0.7 1.0 0.9 1.2 1.5Other OECD members 0.0 0.0 0.0 0.0 0.0 0.1China –0.1 –0.1 0.0 –0.1 –0.1 0.0India 0.0 0.0 0.0 0.0 0.0 0.0Less-developed countries –0.1 0.0 0.0 –0.1 –0.1 0.0EEFSU –0.3 –0.2 –0.1 –0.9 –0.8 –0.7OPEC –0.2 –0.2 –0.2 –0.3 –0.3 –0.3

Source: Authors’ simulations.Note: Exchange rates are measured as dollars per unit of foreign currency. OECD = Organization for Economic Cooperation and

Development; EEFSU = Eastern Europe and the former USSR; OPEC = Organization of the Petroleum Exporting Countries.

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the EEFSU. Table 1-14 shows that the carbon tax reduces U.S. GDP by 0.6 to0.7 percent and other OECD members’ GDP by 0.3 to 0.4 percent. Adding BTAshas negligible effect on U.S. GDP but increases the effect on other OECD mem-bers’ GDP to reductions of 0.8 to 0.1 percent. Also, additional regions areaffected as well, particularly developing countries.

As shown in table 1-15, the carbon tax reduces U.S. carbon emissions bymuch more than it reduced European emissions: 303 to 577 mmt per year overthe period 2010–30. As with the European case, the carbon tax alone leads tosome leakage of emissions: World emissions fall by 293 to 554 mmt. Leakage,therefore, ranges from 10 to 23 mmt, or 3 to 4 percent of the U.S. reduction.


Table 1-13. Simulated Effects of European Policies on European Prices and Output,2010, 2020, and 2030


Prices Quantities

Sector 2010 2020 2030 2010 2020 2030

EU-TaxElectric utilities 1.6 1.9 2.2 –1.0 –1.1 –1.3Gas utilities 0.5 0.4 0.5 –1.3 –1.6 –1.9Petroleum refining 4.5 5.1 6.1 –2.8 –3.0 –3.4Coal 22.5 27.8 33.4 –7.5 –9.8 –13.1Crude oil 4.9 5.6 6.7 –3.3 –4.0 –5.1Mining 0.5 0.4 0.5 –1.0 –0.8 –0.9Agriculture 0.4 0.3 0.4 –0.1 –0.1 –0.2Forestry and wood products 0.3 0.2 0.2 –0.5 –0.4 –0.4Durables 0.3 0.1 0.2 –1.1 –0.6 –0.7Nondurables 0.4 0.4 0.4 –0.2 –0.1 –0.2Transportation 0.5 0.5 0.6 –0.4 –0.4 –0.4Services 0.3 0.2 0.2 0.0 0.1 0.1

EU-TaxAdjElectric utilities 1.6 1.9 2.2 –0.9 –1.0 –1.2Gas utilities 0.5 0.4 0.5 –1.3 –1.6 –1.9Petroleum refining 4.8 5.6 6.6 –2.4 –2.6 –3.0Coal 22.3 27.5 33.1 –7.5 –9.8 –13.0Crude oil 4.8 5.5 6.5 –3.1 –3.7 –4.8Mining 0.5 0.5 0.6 –1.2 –0.9 –1.0Agriculture 0.3 0.3 0.3 –0.2 –0.2 –0.2Forestry and wood products 0.2 0.1 0.1 –0.5 –0.4 –0.4Durables 0.2 0.1 0.1 –1.2 –0.7 –0.8Nondurables 0.4 0.4 0.4 –0.2 –0.2 –0.2Transportation 0.5 0.5 0.6 –0.5 –0.4 –0.5Services 0.2 0.1 0.2 0.1 0.2 0.2

Source: Authors’ simulations.

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As with the European simulations, adding BTAs causes the U.S. reduction tobe smaller but causes larger drops in emissions outside the United States andresults in slightly larger global reductions: 297 to 558 mmt annually over theperiod 2010–30.

The effects on short- run interest rates are shown in table 1-16, and the maineffect is a small reduction in rates in the United States. Under the carbon tax,


Table 1-14. Simulated Effects of U.S. Policies on Real Gross Domestic Product, 2010,2020, and 2030


US-Tax US-TaxAdj

Country or Group 2010 2020 2030 2010 2020 2030

United States –0.6 –0.6 –0.7 –0.6 –0.6 –0.7Japan 0.0 0.0 0.0 –0.1 –0.1 –0.1Australia 0.0 0.0 0.0 –0.1 –0.1 0.0Europe 0.0 0.0 0.0 –0.1 –0.1 –0.1Other OECD members –0.4 –0.3 –0.3 –1.0 –0.8 –0.8China 0.0 0.0 0.0 0.0 0.0 0.0India 0.0 0.0 0.0 –0.1 –0.1 –0.1Less-developed countries –0.2 –0.1 –0.1 –0.5 –0.2 –0.2EEFSU 0.0 0.0 0.0 –0.1 –0.1 –0.1OPEC –0.4 –0.3 –0.3 –0.5 –0.4 –0.3



Table 1-15. Simulated Effects of U.S. Policies on Carbon Emissions, 2010, 2020, and 2030

Millions of metric tons

US-Tax US-TaxAdj

Country or Group 2010 2020 2030 2010 2020 2030

United States –303 –422 –577 –279 –390 –535Japan 0 0 0 –1 –1 –1Australia 0 0 0 0 0 0Europe 1 2 2 –2 –3 –3Other OECD members 3 4 6 –4 –5 –6China 0 0 0 –1 –2 –2India 0 0 0 –1 –1 –1Less-developed countries 5 8 11 –6 –4 –5EEFSU 1 1 2 –2 –2 –2OPEC 0 0 1 –1 –1 –2Total –293 –405 –554 –297 –407 –558



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the result is a small capital outflow, as reflected in the shift of the currentaccount toward surplus in table 1-18. Interestingly, the capital flow reversesunder the BTA policy. When the United States increases its tariffs, the reduc-tion in trade reduces GDP in many regions (table 1-14) and leaves the U.S.economy in a relatively stronger position. The dollar strengthens in both sim-ulations, as shown in table 1-19.


Table 1-16. Simulated Effects of U.S. Policies on Short-Run Interest Rates, 2010, 2020,and 2030

Percentage point change

US-Tax US-TaxAdj

Country or Group 2010 2020 2030 2010 2020 2030

United States –0.02 –0.03 –0.03 –0.05 –0.04 –0.04Japan –0.01 0.00 0.00 –0.01 0.01 0.01Australia –0.02 –0.01 –0.01 –0.03 –0.01 –0.01Europe –0.01 0.00 0.00 –0.02 0.00 0.00Other OECD members –0.01 0.00 0.00 0.03 0.00 0.00China –0.01 0.00 0.00 0.00 0.01 0.01India 0.00 0.00 0.00 0.01 0.01 0.01Less-developed countries –0.01 0.00 0.00 0.01 0.01 0.01EEFSU –0.01 0.00 0.00 –0.01 0.00 0.00OPEC 0.01 0.01 0.01 0.02 0.01 0.01



Table 1-17. Simulated Effects of U.S. Policies on Trade Balances, 2010, 2020, and 2030

Billions of dollars

US-Tax US-TaxAdj

Country or Group 2010 2020 2030 2010 2020 2030

United States –0.5 –0.9 0.4 –4.6 –1.2 4.3Japan –0.2 0.7 0.9 0.4 1.6 1.6Australia 0.2 0.2 0.1 0.6 0.4 0.3Europe –1.0 –0.4 –0.8 0.5 –0.5 –2.7Other OECD members 1.2 0.9 0.5 2.9 1.9 1.0China –0.4 0.0 0.0 –0.8 0.0 –0.3India 0.0 0.1 0.2 0.1 0.3 0.3Less-developed countries 0.3 –0.1 –0.4 1.4 –0.8 –1.6EEFSU 0.4 0.5 0.5 1.0 1.1 1.0OPEC 0.5 –0.3 –0.7 –0.1 –1.0 –1.5



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As shown in table 1-20, the U.S. carbon tax causes much larger percentagechanges in fuel prices than did the European tax, reflecting the lower initialenergy prices in the United States. The price of coal rises by 50 to 94 percent,compared with the 23 to 33 percent increase under the European policy. Fuelconsumption, in turn, falls by larger percentages; coal, for example, drops by20 to 29 percent rather than the 8 to 13 percent in Europe. It is interesting to


Table 1-18. Simulated Effects of U.S. Policies on Current Accounts, 2010, 2020, and 2030

Billions of dollars

US-Tax US-TaxAdj

Country or Group 2010 2020 2030 2010 2020 2030

United States 0.8 0.2 1.8 –5.1 –4.2 0.0Japan –1.4 –1.0 –1.5 –1.7 –1.4 –2.6Australia 0.3 0.4 0.5 0.8 0.9 1.1Europe –2.1 –1.6 –2.4 –0.3 –0.5 –2.1Other OECD members 1.4 1.6 1.7 3.5 3.6 4.0China –0.6 –0.2 –0.4 –0.9 –0.2 –0.7India 0.0 0.1 0.1 0.2 0.3 0.3Less-developed countries 0.5 0.4 0.4 3.0 1.7 1.9EEFSU 0.4 0.5 0.7 1.2 1.5 1.7OPEC 0.8 0.4 0.4 0.3 –0.3 –0.4



Table 1-19. Simulated Effects of U.S. Policies on Real Exchange Rates, 2010, 2020, and 2030


US-Tax US-TaxAdj

Country or Group 2010 2020 2030 2010 2020 2030

United States — — — — — —Japan –2.0 –2.1 –2.4 –4.6 –5.0 –5.6Australia –1.7 –1.8 –2.0 –3.9 –4.1 –4.4Europe –1.8 –1.9 –2.2 –4.2 –4.5 –5.0Other OECD members –2.2 –2.4 –2.6 –5.0 –5.4 –5.9China –1.8 –1.9 –2.2 –4.1 –4.5 –5.0India –1.8 –2.0 –2.3 –4.3 –4.7 –5.2Less-developed countries –1.8 –2.0 –2.3 –4.2 –4.7 –5.2EEFSU –1.8 –1.9 –2.2 –4.1 –4.4 –4.8OPEC –2.2 –2.5 –2.8 –4.1 –4.7 –5.2



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note that the BTAs generally do not have the mild protective effect seen underthe European case. The reduction in world GDP, and the consequent drop indemand for U.S. exports, more than offsets the shift of domestic consumptionfrom imports to domestic producers.

Conclusion

Carbon taxes on trade in primary energy commodities (that is, coal, oil, nat-ural gas) are straightforward and would likely be part of any domestic carbontax or permit trading system. Computing BTAs for the carbon content of allother traded goods and services, however, is very complex. In practice, it would


Table 1-20. Simulated Effects of U.S. Policies on U.S. Prices and Output, 2010, 2020, and 2030


Prices Quantities

Sector 2010 2020 2030 2010 2020 2030

US-TaxElectric utilities 6.6 7.9 9.4 –3.6 –4.3 –5.0Gas utilities 1.1 1.2 1.4 –3.7 –4.4 –5.3Petroleum refining 14.3 17.2 20.6 –10.9 –12.4 –13.8Coal 59.7 75.9 94.3 –19.4 –23.7 –28.3Crude oil 18.6 22.6 27.2 –13.2 –15.3 –19.0Mining 0.6 0.6 0.7 –1.0 –0.8 –0.8Agriculture 0.3 0.4 0.4 –0.3 –0.3 –0.4Forestry and wood products 0.0 –0.1 0.0 –0.4 –0.2 –0.3Durables –0.1 –0.2 –0.2 –0.7 –0.4 –0.4Nondurables 0.3 0.4 0.5 –0.2 –0.2 –0.3Transportation 0.5 0.5 0.6 –0.4 –0.3 –0.4Services 0.2 0.2 0.2 0.1 0.1 0.1

US-TaxAdjElectric utilities 6.6 8.0 9.5 –3.5 –4.2 –4.9Gas utilities 1.1 1.1 1.3 –3.7 –4.4 –5.2Petroleum refining 14.9 18.2 22.0 –9.1 –10.4 –11.7Coal 59.5 75.8 94.2 –19.5 –23.9 –28.5Crude oil 17.0 20.8 25.2 –13.3 –15.3 –18.9Mining 0.5 0.5 0.7 –1.6 –1.4 –1.4Agriculture 0.1 0.2 0.3 –0.6 –0.6 –0.7Forestry and wood products –0.3 –0.3 –0.3 –0.2 0.0 –0.1Durables –0.1 –0.1 0.0 –1.1 –0.7 –0.8Nondurables 0.3 0.3 0.5 –0.3 –0.3 –0.4Transportation 0.5 0.5 0.6 –0.3 –0.3 –0.4Services 0.2 0.1 0.2 0.2 0.2 0.2

Source: Authors’ simulations.

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require calculations on a country- of- origin basis for all trading partners of thecountry applying the BTAs. The complexities increase when a good that hasbeen manufactured contains intermediate goods that have a number of differ-ent sources across countries. However, our results show that the tariffs wouldbe small for most goods at moderate carbon tax levels. At an aggregate level,the adjustments for most manufactured goods would be on the order of 1 or 2percent. However, within some narrowly defined and energy- intensive indus-tries, such as aluminum refining, the rates would be considerably higher. Also,the adjustments are proportional to the carbon tax being imposed, so very highcarbon taxes could lead to more significant BTAs.

We find that the BTAs would be effective at reducing leakage of emissions,but leakage is very small even without the BTAs. Moreover, much of the emis-sions gain that does occur comes about because the tariffs reduce world GDPthrough the overall reduction in international trade. Finally, because the BTAsare small, they have little effect on import- competing industries. We concludethat the benefits produced by BTAs for traded goods and services would besmall, and they are unlikely to justify their administrative complexity or theirdeleterious effects on international trade.


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Comments

Comment by Nils Axel Braathen

Any nonglobal policy to combat climate change would lead to some “leak-age” of emissions to countries that do not participate in the “carboncoalition”—and demands for protection of the competitiveness of the most vul-nerable economic sectors are to be expected. This leakage can occur throughthree main channels:

—via losses in competitiveness of certain sectors;—via the markets for fossil fuels— because a reduction in fuel demand in

the coalition would lead to lower world- market fuel prices and increased fueldemand in other countries;

—via changes in foreign direct investments.The Organization for Economic Cooperation and Development (OECD) pub-

lished studies of the effects of carbon taxes and border tax adjustments (BTAs)in the steel and cement sectors a few years ago— based on simulations withpartial equilibrium models.1 These simulations indicated that a nonglobal car-bon tax could have a clear negative impact on the competitiveness of thesesectors within the coalition— and that, in principle, BTAs could significantlyreduce these effects.

For example, the steel sector study illustrated the effects of an OECD- widetax of $25 per metric ton of carbon dioxide (CO2). In this context, it was foundthat if both import taxes and export subsidies were implemented and were dif-ferentiated across steel types, and if the border tax rates were linked to emissionlevels in non- OECD countries, the decline in OECD steel production might beas small as 1 percent— as opposed to 9 percent if no adjustments were made.At the same time, the reduction in global emissions (5.1 percent) would belarger than without BTAs (4.6 percent). This is because the border taxes keep

1. For steel, see OECD (2003). For cement, see OECD (2005).

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a higher share of world steel production within the OECD area, thus makingmore steel producers subject to the OECD- wide carbon tax.

Given their partial nature, these simulations only capture the first of the threesources of leakage listed above. Ongoing simulations with a general equilib-rium model (called ENV- Linkages) at the OECD also capture the second sourceof leakage— and these simulations indicate that the effects via the fossil fuelmarkets under certain conditions are much more important than the sectoralcompetitiveness effects.2,3

However, the relative magnitude of fossil fuel market effects and sectoralcompetitiveness effects on total leakage seems to depend on the size of the car-bon coalition. If the coalition is “large”—say, comprising all the Annex I countries— global fossil fuel demand would be reduced to a significant extent,which would trigger a significant reduction in world market fuel prices (espe-cially for oil). This would in turn lead to a relatively strong increase in thedemand for these fuels in countries outside the coalition— making this sourceof leakage dwarf the leakage effects stemming from a loss of sectoral com-petitiveness. In such a situation, BTAs would affect total carbon leakage onlyto a limited extent— in line with the findings of McKibbin and Wilcoxen.

If, conversely, the size of the carbon coalition is much smaller— say, onlycomprising the EU countries— the effects on global fossil fuel demand wouldbe much smaller, leading to less leakage through this channel. Total leakage inthis case would, however, be larger than in the previous case, due to more impor-tant sectoral competitiveness effects. In such a situation, the environmentalarguments for applying BTAs could be somewhat stronger— with some impor-tant caveats, mentioned below.

While McKibbin and Wilcoxen’s G- Cubed model covers only CO2 emis-sions, the ENV- Linkages model also include other greenhouse gases, and thethis seem to be of some importance. As long as not all relatively low- cost abate-ment options related to non- CO2 greenhouse gases have been exhausted, totalleakage tends to be lower when these gases are included in the analysis— asthe effects are shifted from the fossil fuel markets, hence reducing the leak-ages that are generated through this channel, to other sectors, in particularagriculture.

It should, however, be kept in mind that the distortions created by BTAswould represent a significant economic cost— even when disregarding the veryimportant administrative costs they would entail. As indicated by McKibbin

Comments on Chapter 1 25

2. OECD (2008) provides further information about these simulations.3. As opposed to the ENV- Linkages model, the model used by McKibbin and Wilcoxen, G-

Cubed, also captures carbon leakages that stem from changes in foreign direct investment.Unfortunately, the chapter does not indicate the relative magnitude of these effects.

01-0298-6 ch01:Layout 1 7/29/09 9:58 AM Page 25

and Wilcoxen, to be as effective as possible, the BTAs on imports ought to bebased on the carbon content of relevant products in the country where they are produced— which obviously would be very difficult to monitor and enforce inpractice.

Further, the compatibility of carbon- policy- based BTAs with World TradeOrganization (WTO) rules remains an open question. An overview of this issuein a recent OECD book concluded that only a WTO panel could resolve thequestion of the legality of such measures.4

Regardless of the legality of any BTA measures under the WTO, there is animportant danger that the introduction of such measures could trigger tit- for- tat retaliations from the countries that would be “hit” by these measures. Thiscould in turn have serious effects on world trade and economic development.

Hence— in line with McKibbin and Wilcoxen’s conclusions— BTAs shouldonly be considered as a last resort. The focus should instead be firmly fixed onachieving an ambitious international approach to address the climate changeproblem, with participation by all the major greenhousegas- emitting coun-tries and sectors.

Comment by (Tom) Hu Tao

In chapter 1, McKibbin and Wilcoxen quantify the significant differencesin carbon efficiency between the United States and China and India. In so doing,they provide useful analytical insights. I would like to share several commentson the issue of proposals embodied in bills like Lieberman- Warner to imposeimport tariffs based on the carbon content of goods.

First, when addressing the U.S. desire to impose import tariffs based on thecarbon content of goods (as proposed in Lieberman- Warner- type bills) theUnited States’ history with the Kyoto Protocol is relevant. So far, the UnitedStates is the only Annex I country that has not signed the protocol. By contrast,China and India have signed the protocol, although, because they are non–Annex Icountries, they do not have legally binding obligations for greenhouse gasreductions. The post- protocol negotiation is still under way following the BaliRoad Map, and there are as yet no new agreements. Given that the United Stateshas not signed the protocol and that China and India have, it is not clear howthe United States’ proposed “punishment” of these countries is consistent withinternational agreements like the United Nations Framework Convention onClimate Change and the protocol.


4. OECD (2006, chapter 5).

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Second, the Lieberman- Warner Bill and other similar bills ignore China’sown domestic policies. On January 1, 2007, China implemented export tariffsranging from 5 to 25 percent on carbon-, pollution-, and resource- intensive prod-ucts, including iron, steel, coke, cement, and so on. Thus, China has alreadyinternalized the environmental costs in the prices of these products beforeexporting them. The tariff rate that China has applied is higher than the rateproposed in legislation. Therefore, it is unclear why the United States needs toimplement a border tax adjustment (BTA) to internalize the environmentalcosts from China. In fact, if the United States were to implement such a bill, itwould amount to the double taxation of the environmental externality for U.S.users of such products.

Third, though this proposed legislation is addressing U.S. competitivenessworries stemming from stronger environmental protection, China may also havecompetitiveness worries. U.S. products are not always more energy- efficientthan Chinese products. More and more Chinese products have higher energyefficiency standards than U.S. products. For example, China has adopted Euro IV vehicle emission standards, which are more stringent than both U.S.and California emission standards. Since China started the China Energy Effi-ciency Program two years ago, it has implemented more stringent energystandards than the United States for such products as refrigerators, air condi-tioners, washers, and other electric and electronic appliances. By the same logicthat the United States is looking at BTAs, China could seek BTAs on the prod-ucts mentioned above. Additionally, if BTAs come into vogue, China and Indiamight view subsidized U.S. agricultural products as meriting BTAs on com-petitiveness grounds.

Fourth, this type of legislation is inconsistent with other aspects of U.S. pol-icy. The Office of the United States Trade Representative (USTR), in a reportsubmitted to Congress on China’s implementation of World Trade Organiza-tion (WTO) commitments in December 2007, accused China of violating WTOrules on twelve products, including some highcarbon- content products, likecoke for iron and steel. Later, the USTR warned China that it would bring acase at the WTO if China did not abolish export limits for these twelve prod-ucts. The proposed legislation trying to reduce exports of highcarbon- contentproducts from China is inconsistent with the USTR’s attempts to increaseexports of certain highcarbon- content products.


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Comment by Arik Levinson

McKibbin and Wilcoxen’s analysis in chapter 1 of this volume is prospec-tive. It predicts future trade patterns after developed countries unilaterallyimpose hypothetical carbon taxes that disproportionately affect carbon- intensiveindustries. Their analysis is sophisticated, state of the art, and probably the bestconceivable approximation of the true future effect of carbon taxes on trade,but it remains in the end a forecast— arguably not something at which econo-mists excel.

My point, then, is that we can learn about the significance of the carbon con-tent of trade by a retrospective analysis, so long as we are willing to replace as- yet- unregulated carbon for a pollutant developed countries began regulat-ing thirty years ago. The idea is that it is easier to say what happened thirtyyears ago than to predict what will happen thirty years from now.

Thirty years ago, the United States unilaterally imposed strict pollution reg-ulations that disproportionately affected pollution- intensive industries, raisingfears that those industries would relocate to “pollution havens,” a process nowbeing called “leakage.” Pollution- abatement operating costs for the manufac-turing sector in the United States doubled as a fraction of value shipped between1974 and 1991, but this doubling was spread unevenly across industries. Forsome industries (petroleum refining, primary metals, pulp and paper), coststripled or even quadrupled. For others, pollution- abatement costs remained smallor even declined. Did this change in comparative advantage across manufac-turing industries lead to leakage in the past? For the evidence of that, it is usefulto begin with U.S. manufacturing output for 1972 to 2001, depicted in figure1C-1.

The top line in figure 1C-1 plots the real value shipped by U.S. manufac-turers, from 1972 to 2001, indexed so the 1972 value equals 100. Realmanufacturing output rose 71 percent. If over this period there were no changein the technology of abatement or production, and no change in the mix of indus-tries making up U.S. manufacturing, then we would expect pollution emittedby U.S. manufacturers to also have risen 71 percent over this period. (Manu-facturers would be producing 71 percent more of the same goods using thesame methods.) But of course we know that the composition of U.S. manu-facturing output has changed. America produces different goods today than itdid thirty years ago— and one of the reasons might be “leakage” caused by pol-luting industries avoiding U.S. environmental regulations.

The bottom line in figure 1C-1 calculates the extent of the change in thecomposition of U.S. industries as it affects one particular pollutant, sulfur diox-ide (SO2). It uses the 1997 emissions intensities of each of the 470 industries


01-0298-6 ch01:Layout 1 7/29/09 9:58 AM Page 28

that make up the manufacturing sector, as calculated by the U.S. Environmen-tal Protection Agency. For every year, I multiplied each industry’s output byits corresponding 1997 emissions intensity, and then summed the predicted SO2

emissions across all industries. The result is the predicted amount of SO2 thatwould have been emitted by U.S. manufacturing, using the 1997 technologiesbut the concurrent scale and mix of industries. The bottom line rises 19 per-cent and is lower than the 71 percent manufacturing growth for one reason:U.S. manufacturing shifted toward industries that emit less SO2. This “greenshift” of U.S. manufacturing composition resulted in SO2 emissions that were30 percent lower than they would have been had the mix of industries remainedthe same. Where did this extra SO2 pollution go? If the SO2-intensive indus-tries fled to pollution havens and imported their products to the United States,we would call that leakage.

To examine whether the green shift of U.S. manufacturing might be explainedby leakage, figure 1C-2 conducts exactly the same analysis but with importedmanufactured goods instead of domestically produced goods. Here I am care-ful to account for the pollution caused by intermediate inputs to the finalimports, using a Leontief- style input/output calculation similar to that used byMcKibbin and Wilcoxen. The top line in figure 1C-2 depicts the real value of


Figure 1C-1. The Sulfur Dioxide Content of U.S. Manufacturing, 1972–2001

Index: 1972 = 100

+71%

+19%

–30%

1972 1976 1980 1984 1988 1992 1996 2000

150

100

50

U.S. manufacturing output

SO2 content of U.S. manufacturing (1997 basis)

Source: Author's calculations based on NBER-CES Manufacturing Productivity Database, and EPA Trade and Environmental Assess-ment Model (TEAM).

01-0298-6 ch01:Layout 1 7/29/09 9:58 AM Page 29

imports, which increased 641 percent from 1972 to 2001. The bottom linedepicts the SO2 that would have been emitted as a consequence of manufac-turing those imports, had they been produced in the United States using 1997technologies.

Figure 1C-2 depicts two noteworthy results. First, the composition of importsbecame cleaner over time, not dirtier. The 30 percent green shift of U.S. man-ufacturing was not accompanied by a corresponding “brown shift” on the partof imported goods. Instead, the composition of imports also shifted toward less- pollution- intensive goods. Second, and perhaps more startling, imports shiftedtoward less- polluting goods faster than domestic goods. The SO2 content ofimported goods was 43 percent lower that it would have been if the mix ofgoods being imported had remained constant.

Now, some might look at figure 1C-2 and note that U.S. imports are domi-nated by trade with other developed economies that were themselves enactingstrict environmental regulations during this period: Canada, Japan, and the Euro-pean nations. If there was leakage, perhaps the SO2 moved to developingcountries that were more likely to be pollution havens. That shift might not be


Figure 1C-2. The Sulfur Dioxide Content of U.S. Imports, 1972–2001

Index: 1972 = 100

+641%

+326%

–43%

All imports

SO2 content of U.S. manufactured imports (1997 basis)

1972 1976 1980 1984 1988 1992 1996 2000

800

700

600

500

400

300

200

100

Source: Author's calculations based on NBER-CES Manufacturing Productivity Database, Center for International Data(www.internationaldata.org), and Bureau of Economic Analysis 1997 Input-Output Tables.

01-0298-6 ch01:Layout 1 7/29/09 9:58 AM Page 30

apparent in aggregate import data, which were composed mostly of importsfrom developed economies.

To address that concern, figure 1C-3 conducts exactly the same analysis butlimited to imports from countries that are not members of the Organization forEconomic Cooperation and Development (OECD). The figure rebuts the con-jecture that leakage will be apparent in import data from less- developed countries.In fact, the green shift in imports from non- OECD countries (50 percent) waseven larger than the green shift in aggregate imports (43 percent), which wasitself larger than the green shift in domestic production (30 percent).

Thirty years ago, the United States began seriously regulating industrial emis-sions of common air pollutants such as SO2. In the ensuing years, the U.S.manufacturing base has shifted away from production of goods that emit SO2.But at the same time, imports to the United States, in general and from non- OECD countries in particular, have also shifted away from SO2-intensive goods.

Note that these trends do not mean that there was no leakage of SO2 emis-sions from the United States to importing countries. It could be that there wasleakage, and as a consequence, the U.S. manufacturing green shift was largerthan it otherwise would have been, and the imported goods’ green shift was


Figure 1C-3. The Sulfur Dioxide Content of U.S. Imports from Countries That Are NotMembers of the Organization for Economic Cooperation and Development (OECD),1972–2001

Index: 1972 = 100

+1555%

+721%

–50%

SO2 content of non-OECD manufactured imports

1972 1976 1980 1984 1988 1992 1996 2000

Non-OECD imports

1,800

1,600

1,400

1,200

1,000

800

600

400

200

Source: Author's calculations based on NBER-CES Manufacturing Productivity Database, Center for International Data(www.internationaldata.org), and Bureau of Economic Analysis 1997 Input-Output Tables.

01-0298-6 ch01:Layout 1 7/29/09 9:58 AM Page 31

smaller. To assess that possibility, we need a general equilibrium analysis likethat of McKibbin and Wilcoxen. All this analysis shows is that if there wasleakage, it is not apparent in aggregate data and was swamped by other changesin the past thirty years: trade liberalization, oil prices, labor costs, and chang-ing preferences. My forecast, then, based on this retrospective analysis, is thatany carbon leakage in the future will also be swamped by as- yet- unforeseenforces affecting the composition of trade.


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Biermann, F., and R. Brohm. 2005. “Implementing the Kyoto Protocol Without the UnitedStates: The Strategic Role of Energy Tax Adjustments at the Border.” Climate Policy4, no. 3: 289–302.

Brack, D., M. Grubb, and C. Windram. 2000. International Trade and Climate ChangePolicies. London: Earthscan.

Brewer, T. 2008. “U.S. Climate Change Policy and International Trade Policy Intersec-tions: Issues Needing Innovation for a Rapidly Expanding Agenda.” Paper preparedfor Seminar of Center for Business and Public Policy, Georgetown University, Wash-ington, February 12.

Campbell J., and N. G. Mankiw. 1990. “Permanent Income, Current Income and Con-sumption.” Journal of Business and Economic Statistics 8, no. 3: 265–79.

Charnovitz, S. 2003. “Trade and Climate: Potential Conflict and Synergies.” In BeyondKyoto: Advancing the International Effort Against Climate Change. Washington: PewCenter on Global Climate Change.

Demailly, D., and P. Quirion. 2006. “CO2 Abatement, Competitiveness and Leakage inthe European Cement Industry under the EU ETS: Grandfathering versus Output- BasedAllocation.” Climate Policy 6, no. 1: 93–113.

Droge, S., and K. Kemfert. 2005. “Trade Policy to Control Climate Change: Does theStick Beat the Carrot?” Vierteljahrshefte zur Wirtschaftsforschung 74, no. 2: S. 235–48.

Feldstein, M., and C. Horioka. 1980. “Domestic Savings and International Capital Flows.”The Economic Journal 90: 314–29.

Flavin, M. A. 1981. “The Adjustment of Consumption to Changing Expectations aboutFuture Income.” Journal of Political Economy 89: 974–1009.

Frankel, J. 2005. “Climate and Trade: Links between the Kyoto Protocol and WTO.” Envi-ronment 47, no. 7 (September): 8–19.

Goh, Gavin. 2004. “The World Trade Organization, Kyoto and Energy Tax Adjustmentsat the Border.” Journal of World Trade 38, no. 3: 395–423.

Gordon, R. H., and A. L. Bovenberg 1996. “Why is Capital so Immobile Internationally?Possible Explanations and Implications for Capital Taxation.” American EconomicReview 86, no. 5: 1057–1075.

Hall, R. E. 1978. “Stochastic Implications of the Life- Cycle Hypothesis: Theory and Evi-dence.” Journal of Political Economy 86: 971–87.

Hayashi, F. 1979. “Tobin’s Marginal q and Average q: A Neoclassical Interpretation.”Econometrica 50: 213–224.

Hayashi, F. 1982. “The Permanent Income Hypothesis: Estimation and Testing by Instru-mental Variables.” Journal of Political Economy 90, no. 4: 895–916.

Hoerner, A. 1998. “The Role of Border Tax Adjustments in Environmental Taxation: The-ory and U.S. Experience.” Paper presented at International Workshop on Market- BasedInstruments and International Trade, Institute for Environmental Studies, Amsterdam,March 19.

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Hontelez. J. 2007. “Time to Tax Carbon Dodgers” Viewpoint, BBC News(http://news.bbc.co.uk/2/hi/science/nature/6524331.stm [October 2008]).

Ismer, R., and K. Neuhoff. 2007. “Border Tax Adjustment: A Feasible Way to SupportStringent Emission Trading.” European Journal of Law and Economics 24: 137–64.

Kopp, R., and W. Pizer. 2007. Assessing U.S. Climate Policy Options. Washington:Resources for the Future.

Levinson, A., and S. Taylor. 2008. “Unmasking the Pollution Haven Effect.” InternationalEconomic Review 49, no. 1 (February): 223–54.

Lockwood, B., and J. Whalley. 2008. “Carbon Motivate Border Tax Adjustment: Old Winein Green Bottles.” NBER Working Paper 14025. Cambridge, Mass.: National Bureauof Economic Research.

Lucas, R. E. 1967. “Optimal Investment Policy and the Flexible Accelerator.” Interna-tional Economic Review 8, no. 1: 78–85.

McKibbin, W. J., and J. Sachs. 1991. Global Linkages: Macroeconomic Interdependenceand Co- operation in the World Economy. Brookings.

McKibbin, W. J., and D. Vines. 2000. “Modelling Reality: The Need for Both Intertem-poral Optimization and Stickiness in Models for Policymaking.” Oxford Review ofEconomic Policy 16, no. 4: 106–37.

McKibbin, W., and P. Wilcoxen. 1997. “The Economic Implications of Greenhouse GasPolicy.” In Environment and Development in the Pacific: Problems and Policy Options,ed. H. English and D. Runnals. Reading, Mass.: Addison- Wesley, Longman.

———. 1998. “The Theoretical and Empirical Structure of the G-Cubed Model.” Eco-nomic Modelling 16, no. 1: 123–48.

OECD (Organization for Economic Cooperation and Development). 2003. Environmen-tal Policy in the Steel Industry: Using Economic Instruments (www.oecd.org/dataoecd/58/20/33709359.pdf [November 2008]).

———. 2005. The Competitiveness Impact of CO2 Emissions Reduction in the CementSector (www.olis.oecd.org/olis/2004doc.nsf/LinkTo/nt0000a252/$file/jt00194233.pdf[November 2008]).

———. 2006. The Political Economy of Environmentally Related Taxes (www.oecd.org/env/taxes/politicaleconomy [November 2008]).

———. 2008. Climate Change Mitigation: What do we do? (www.oecd.org/dataoecd/31/55/41751042.pdf [November 2008]).

Pearce, D., and W. McKibbin. 2007. “Two Issues in Carbon Pricing: Timing and Com-petitiveness.” Lowy Institute Working Paper in International Economics 1.07(www.lowyinstitute.org/Publication.asp?pid=575 [October 2008]).

Stiglitz, J. 2006. “A New Agenda for Global Warming” Economists Voice, July(www.bepress.com/ev [October 2008]).

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Uzawa, H. 1969. “Time Preference and the Penrose Effect in a Two Class Model of Eco-nomic Growth.” Journal of Political Economy 77: 628–52.

34 References

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International Trade Law and the Economics ofClimate Policy: Evaluating the Legality

and Effectiveness of Proposals to Address Competitiveness and Leakage Concerns

There is a growing consensus that a market mechanism that puts a price oncarbon, such as a cap- and- trade system or a carbon tax, should be at the

heart of the most flexible and cost- effective way to address climate change.1

Ideally, such an approach would be adopted as part of a multilateral agreement.The reason is that carbon is a global pollutant, so a ton of carbon emitted inBeijing contributes to climate change just as much as a ton of carbon emittedin New York. This tragedy- of- the- commons nature of climate change raisesconcerns that any unilateral effort by the United States to put a price on car-bon could disadvantage U.S. industrial firms or undermine the measure’senvironmental objective. These two concerns, in effect flip sides of the samecoin, are referred to as “competitiveness” and “leakage,” respectively. The com-petitiveness concern is that U.S. products— particularly carbon- intensive oneslike steel, cement, chemicals, glass, and paper— will be at a competitive dis-advantage relative to foreign- made goods if the United States unilaterallyimposes a carbon price policy and thus raises production costs for U.S. firms.2

35

J A S O N E . B O R D O F F 2

For helpful comments and discussion, the author would like to thank Joseph Aldy, Joel Beau-vais, Steven Charnovitz, Manasi Deshpande, Elliot Diringer, Douglas Elmendorf, Andrew Guzman,Michael Levi, Bryan Mignone, Robert Novick, Warren Payne, Billy Pizer, Andrew Shoyer, Tim-othy Taylor, and Mark Wu. He especially thanks Pascal Noel for exceptionally valuable researchassistance. Leandra English and Julie Anderson also provided helpful editorial assistance.

1. For a detailed discussion about why a market mechanism is preferable to alternativeapproaches, see Furman and others (2007).

2. A recent study by the Peterson Institute identifies the following carbon-intensive manufac-turing industries that compete with foreign producers: ferrous metals (iron and steel), nonferrousmetals (aluminum and copper), nonmetal mineral products (cement and glass), paper and pulp,and basic chemicals. See Houser and others (2008). The Lieberman-Warner Bill specifically names“iron, steel, aluminum, cement, bulk glass, or paper” as “primary products,” though it permits theadministrator to include “any other manufactured product that is sold in bulk for purposes of fur-

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The second, related concern— emissions leakage— occurs when a policy thatraises the price of carbon- intensive domestic goods causes domestic produc-tion to shift abroad and domestic consumption to shift to more carbon- intensiveimports, thus undermining the policy’s effect on reducing global levels ofgreenhouse gases (GHGs). Leakage also may occur as a result of reduceddomestic demand for fossil fuel products, which depresses fuel prices in theglobal market and thus results in increased consumption.

An often- proposed response to the related concerns about competitivenessand leakage, which indeed has been incorporated into the leading cap- and- tradelegislation, is to level the carbon playing field and encourage developing coun-tries to adopt climate change policies by imposing a border adjustment thatputs a price on the carbon contained in imports from countries without simi-larly stringent climate policies. Under a cap- and- trade system, this bordermeasure could take the form of a requirement that importers from countrieswithout comparable emissions reduction policies purchase emissionsallowances to cover the carbon content of their products (or, alternatively, paya tax equal to the allowance price). In theory, U.S. exporters might also be pro-vided with allowances as rebates for the price of the embedded carbon in theirproducts (though no proposal today calls for this).

Though perhaps sound in theory, the wisdom of leveling the carbon play-ing field by imposing border adjustments is more debatable when the expectedbenefits are weighed against the potential harms. The second section of thischapter briefly outlines these benefits and harms, and finds that one of the oft- cited benefits (and one that is most relevant under international law)—thereduction in GHG emissions— is likely to be quite small. To help fully explainthe expected costs, and thus better compare them with the expected benefits ofcompetitiveness and leakage prevention measures, the third section then ana-lyzes one particular concern regarding the compatibility with World TradeOrganization’s (WTO’s) law of border adjustments. Given space constraints,this chapter does not explore all the novel issues or claims that might be raisedin evaluating such a complex legal question. Rather, the purpose of this sec-tion is to highlight the key questions that a WTO panel would raise in itsanalysis, focusing on how that legal analysis should be informed by the eco-nomics of a cap- and- trade system. As with any complex legal question, it isdifficult to predict with any certainty how a WTO panel would rule, but the

36 Brookings Trade Forum 2008/2009

ther manufacture” and generates significant greenhouse gas (GHG) emissions during production.America’s Climate Security Act of 2007, S 2191, 110th Cong. [hereafter ACSA], Sec. 6001 (10).Unless otherwise noted, references to Lieberman-Warner throughout do not reflect revisions in themanager’s substitute amendment, released May 21, 2008 (http://epw.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=aaf57ba9-ee98-4204-882a-1de307ecdb4d [October2008]).

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section identifies several ways in which a border adjustment might not be com-pliant with WTO law. Viewing border adjustments through the lens of WTOlaw also raises broader questions about the wisdom of imposing border adjust-ments as a policy matter. As an alternative, some have proposed the use of freeallocation to address competitiveness concerns and political exigencies, andthe fourth section considers the desirability and WTO compatibility of thatapproach, concluding that although free allocation, depending on its design,may be WTO compliant, that is precisely because it will be largely ineffectivein protecting U.S. industries and workers, instead effectively constituting a trans-fer from government to shareholders of firms. The fifth section concludes thatthe expected costs from both border adjustments and free allocation may welloutweigh the benefits, and it suggests alternative mechanisms to address cli-mate change while mitigating leakage and adverse effects on workers in carbon- intensive sectors.

The Expected Benefits and Harms of Border Adjustments

Weighing the expected benefits of border adjustments against the expectedharms raises doubts about the wisdom and effectiveness of such measures. Asto the expected benefits, there are at least three. First, the environmental ben-efit of border adjustments would be to avoid some of the increase in foreignemissions that would otherwise occur in response to a unilateral U.S. climatepolicy. This potential increase in foreign emissions (that is, leakage) is small,however. Though estimates vary, most suggest that roughly 10 percent of thereduction in U.S. emissions will be replaced by increases in foreign emissions.3

Most U.S. emissions occur in nontradable sectors, such as transport and resi-dential housing. Further, some firms use little energy relative to other factorsthat may be more important in determining the location of trade.4 Even in carbon- intensive sectors, it is estimated that production will decline in response

Jason E. Bordoff 37

3. The Environmental Protection Agency estimates U.S. emissions leakage rates under Lieberman-Warner of approximately 11 percent in 2030 and 8 percent in 2050. “EPA Analysis of the Lieber-man-Warner Climate Security Act of 2008 S 2191 in 110th Congress, March 14, 2008” [hereafterEPA Analysis S 2191], 84 (www.epa.gov/climatechange/downloads/s2191_EPA_Analysis.pdf[February 2009]). Paltsev (2001) estimates leakage rates of 10.5 percent from Annex I countriesunder their Kyoto caps, though he estimates U.S. leakage rates (under never-ratified Kyoto tar-gets) of only 5.5 percent. McKibbin and others (1999) estimated in 1999 that if the U.S. unilaterallyadopted Kyoto targets, leakage rates would be roughly 10 percent in 2010. The Intergovernmen-tal Panel on Climate Change (2001) surveys a number of multiregional leakage estimates, findinga range of 5 to 20 percent.

4. For example, energy costs in most manufacturing industries are less than 2 percent of totalcosts; Morgenstern and others (2007).

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to a carbon price more because of a reduction in domestic consumption thanbecause of a shift to imports or the offshoring of production.5

More important, according to a recent analysis by the U.S. EnvironmentalProtection Agency, a border adjustment on carbon- intensive manufacturedimports, like that proposed in the Lieberman- Warner Bill, would reduce that10 percent by only about half a percentage point because it (1) ignores pro-duction leakage due to export competitiveness, (2) applies only to a subset ofimports, and (3) does not address the increased global demand for fossil fuelsin response to the lower prices that reductions in the U.S. quantity demandedwill have.6 The economists Warwick McKibbin and Peter Wilcoxen similarlyfind that border adjustments “would reduce leakage of emissions reductionsvery modestly” (see chapter 1 in this volume).

To keep the environmental benefit of preventing leakage from carbon- intensive industries in perspective, consider that only 6 percent of total U.S.emissions comes from these industries.7 Moreover, if the United States unilat-erally implements a border adjustment, it is easy to envision other countriesreshuffling their trade to avoid the border charge. For example, the United Statesmight import more from Europe and less from Brazil, China, and India, whilethese developing countries just send more to Europe.

Even if border adjustments do little to reduce emissions leakage, some arguethat they can enhance the overall environmental utility of a cap- and- traderegime by achieving greater global GHG reductions in two ways. One argu-ment is that border adjustments will induce developing countries to reduce theirown emissions so as to avoid the border charge. Given that China alone isexpected to account for 47 percent of the growth in GHG emissions over the


5. Aldy and Pizer (2008).6. EPA analysis S 2191, 84. In a scenario where Annex II countries take no action on their own,

but the United States unilaterally adopts an emissions reduction policy, the International ReserveAllowance Requirement in the Lieberman-Warner Climate Security Act reduces leakage from 361metric tons of carbon dioxide equivalent (MtCO2e) to 350 MtCO2e in 2030 (or from 11.6 percentof U.S. reductions to 11.3 percent) and from 412 MtCO2e to 385 MtCO2e in 2050 (or from 8.2percent of U.S. reductions to 7.6 percent). The EPA’s ADAGE model does not allow it to breakout how much of the emissions leakage is from each of these various sources. In his paper meas-uring the emissions leakage from implementing the Kyoto Protocol, however, Paltsev (2001, 68n. 4) finds that leakage from Annex I demand reductions, which lead to reduced world prices andthus increased Annex II consumption, accounts for about one-quarter of total leakage. It is impor-tant to note that the manager’s substitute amendment to Lieberman-Warner expands the definitionof “covered products” to include not only primary carbon-intensive goods but also manufacturedgoods for consumption that generate a substantial quantity of direct and indirect GHG emissions.Sec. 1311 (7) and (14). Even if such broader coverage did more to reduce leakage, it could createenormous administrative challenges. For most downstream goods, however, a carbon price is likelyto be a small enough component of total cost that a border adjustment would do little to changetrade flows.

7. Houser and others (2008, xiv).

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next twenty- five years,8 engaging emerging economies in efforts to address cli-mate change is critically important. Yet only a very small fraction of carbon- intensive products made in China are exported to the United States, soa border adjustment in the United States would be a small stick with which topressure China to implement more costly lowcarbon production processes.Though China accounts for one- third of global steel production, less than 1percent is sold to the United States; the U.S. market also accounts for just 3percent of Chinese aluminum production, 2 percent of paper production, andless than 1 percent of both basic chemicals and cement.9 Moreover, even if bor-der adjustments were successful in reducing emissions in carbon- intensiveindustries, they would do nothing to reduce the three- quarters of Chinese emis-sions that come from other sources.10

The other argument that border adjustments can enhance the environmen-tal effectiveness of a cap- and- trade program concerns the manner in whichforeign firms are permitted to acquire emissions allowances for the importa-tion of carbon- intensive goods. Lieberman- Warner permits firms to buyallowances at a set price from a separate pool outside the domestic cap, whichin effect would be a carbon tax. But it also permits a firm to submit allowancesfrom other comparably effective cap- and- trade systems, such as that in the Euro-pean Union. These allowances would then be retired, thereby reducing totalGHG emissions by an equivalent number of tons. There are three reasons, how-ever, such a provision would, in fact, do little to increase the environmentaleffectiveness of the U.S. cap- and- trade system. First, it only applies if the priceof U.S. permits exceeds the price of permits in other cap- and- trade systems,because otherwise a foreign firm will find it cheaper to buy allowances fromthe U.S. pool. Second, if a Chinese firm buys an allowance from the EU sys-tem for 1 ton of GHG and retires it by submitting it to the United States tosatisfy its import requirement, that would have the effect of tightening the EUcap by 1 ton. In effect, U.S. law would thus be expanding the scope of the EU’s cap- and- trade regime to cover carbon- intensive goods in non- EU countries. Thatis going to drive up the price of permits in the EU and force EU firms and con-sumers to satisfy a more stringent cap than they imposed on themselves. Thelikely response from the EU would then be to relax its cap so that EU coun-tries themselves were still obligated to meet only the emissions target theyoriginally set for themselves, which would negate any greater emissions reduc-tions resulting from the U.S. border adjustment provision. Third and finally, it

Jason E. Bordoff 39

8. Author’s calculations, based on DOE (2008).9. Houser and others (2008, xvi).10. This estimate is based on a personal communication with Trevor Houser, Peterson Insti-

tute for International Economics, July 14, 2008.

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is not clear that the legislation creating the EU’s cap- and- trade system permitsforeign entities to buy allowances in the EU system unless the EU affirmativelyallows it as part of an agreement to link emissions trading schemes.11

The second potential benefit of a border adjustment is that it can protect cer-tain industries by leveling the carbon playing field relative to carbon- intensiveimports. The Environmental Protection Agency, for example, estimates that U.S.imports from Annex II countries— those not subject to the Kyoto Protocol caps— would be roughly 12 percent higher in 2050 without a border adjust-ment than they would be with one.12 To some extent, the benefits to U.S. carbon- intensive manufacturers may be limited by the fact that many of the carbon- intensive imports to the United States come from Annex I countries— those that (with the exception of the United States) are already part of the KyotoProtocol and thus would likely be exempt from most border adjustment pro-posals.13 Indeed, Canada is the largest source of imports in all carbon- intensiveindustries except one, with Europe and Russia not far behind.14 At the sametime, however, the competitiveness benefit may still be considerable becausethe sectors in which roughly two- thirds of U.S. imports come from Annex IIcountries (chemicals and cement) are also among the carbon- intensive sectorsthat comprise the largest shares of U.S. gross domestic product (GDP) andemployment.15 Moreover, the growth rates for imports in these sectors havebeen more rapid than for imports in other carbon- intensive sectors.16

Third, as a political matter, border adjustments also may have the benefit ofhelping to secure passage of a cap- and- trade bill in the U.S. Congress (wheresome measure to address adverse effects on domestic industry likely will benecessary). They might also encourage other developed nations to adopt sim-


11. European Commission (EC), “Directive 2003/87/EC of the European Parliament and ofthe Council of 13 October 2003 Establishing a Scheme for Greenhouse Gas Emission AllowanceTrading within the Community and Amending Council Directive 96/61/EC, Art 12 & 25,” Offi-cial Journal of the European Union, L 275/32, 2003.

12. EPA Analysis S 2191, 85. See also Morgenstern and others (2007).13. Annex I countries account for 54 percent of U.S. steel imports, 78 percent of aluminum

imports, 34 percent of chemicals imports, 87 percent of paper imports, and 35 percent of cementimports. See Houser and others (2008, 44). To be sure, some Annex I countries like Canada mayfail to meet their targets and thus may not be judged to have taken comparably effective measures,even though they are subject to the Kyoto Protocol’s caps.

14. Houser and others (2008, 44). Note that to the extent products from these countries alreadyinternalize a carbon price, U.S. products may be viewed as receiving a subsidy by emitting car-bon without paying such costs. See Stiglitz (2006a, 2006b).

15. Houser and others (2008, 11). Chemicals and cement make up 1.68 and 0.43 percent, respec-tively, of U.S. GDP and 0.65 and 0.38 percent, respectively, of employment. Paper has roughlyequal shares to cement: 0.44 percent of GDP and 0.36 percent of employment. Steel and aluminummake up only 0.29 and 0.20 percent, respectively, of GDP and 0.19 and 0.11 percent, respectively,of employment. Houser and others (2008, table 1.2).

16. Houser and others (2008, 46, figure 3.3).

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ilar policies, which might do more to induce developing countries to negotiatean international agreement.

Against these expected benefits need to be weighed at least three expectedcosts of border adjustments. First, there is a risk that the border adjustment sys-tem could be abused for purely protectionist reasons by U.S. firms facinggrowing global competitive pressures. Second, there is a risk that border adjust-ments could lead to retaliatory tit- for- tat trade wars, particularly with developingnations, which may believe that developed nations bear a greater responsibil-ity for curbing climate change. India or China, for example, could well arguethat the United States bears a greater responsibility for cumulative emissionsand is still a much larger GHG emitter on a per capita basis. Moreover, to thispoint, the United States has taken relatively little action to address climatechange compared with many Kyoto countries, and there is a risk that any even-tual climate change policy would have limited effectiveness once Americansunderstand the true impact of cap- and- trade on energy prices and political pres-sure then builds to ease that pain. In that case, introducing border adjustmentsas a legitimate tool to address climate change may encourage other nations thatare doing more to curb emissions, such as those in the European Union, toimpose such border adjustments on the United States. Border adjustments fora carbon price could also set a dangerous precedent for the use of border taxadjustments to compensate for other competitive disadvantages seeminglyimposed on domestic producers, such as minimum wage or health care regu-lations. Such risks to free trade, which delivers $1 trillion in benefits annuallyto the U.S. economy,17 are particularly harmful at a time when America’s com-mitment to free trade is ever more in doubt.18 Finally, there is a risk that a borderadjustment would be illegal under WTO law, as discussed in the next section,which could potentially lead the WTO to authorize retaliatory tariffs.

Evaluating Border Adjustments under WTO Law

The WTO is the international organization responsible for overseeing themultilateral trading system. It was created in the Uruguay Round of multilat-eral trade negotiations out of what had previously been the General Agreementon Tariffs and Trade (GATT) institutional structure. The WTO also consists ofa treaty that combines a variety of detailed agreements, including the GATT.

Jason E. Bordoff 41

17. Bradford, Grieco, and Hufbauer (2005).18. According to a recent Pew Research Center poll, a 48 percent plurality said that free trade

agreements are a bad thing for the country, compared with 35 percent of the public, who call thema good thing. In July 2004, the positions were reversed, with 47 percent of respondents calling freetrade agreements positive and 34 percent calling them negative. See Pew Research Center (2008).

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The WTO has a dispute settlement system, under which an allegation of a vio-lation of one or more of these agreements can be brought before a WTO paneland, on appeal, to the WTO Appellate Body. If the losing nation fails to adhereto the WTO’s ruling, the complaining nation may seek authority to impose retal-iatory tariffs. Because such a remedy, which precludes retaliation if the offendingprovision is cured, lacks deterrent power, “many governments engage in tradeor economic policies that test the limits of WTO law. This pattern of behaviorought to be kept in mind in considering the extent to which WTO rules lack-ing clarity should constrain the design of climate policies.”19

There are three steps in the analysis of whether a border adjustment is con-sistent with WTO law. First, is the border adjustment consistent with WTOmarket access commitments? If so, is it also consistent with the nondiscrimi-nation obligations under the WTO? If not, is it permissible nonetheless underone of the exceptions provided for under GATT Article XX?20

As to the first question, GATT Article II prohibits tariffs above a particularceiling, and Article XI generally prohibits quantitative restrictions on imports.A border adjustment that applies to imports the same requirements imposedon domestic products is generally permissible as a border- enforced internalmeasure, assuming it does not violate national treatment or most- favored- nationtreatment obligations (discussed below).21 Assuming the border adjustment isimposed as part of an overall domestic cap- and- trade system, therefore, theWTO may well view it as a border- enforced internal measure.22 The focus ofthis analysis, therefore, is on the second and third questions regarding whetherthe measure is discriminatory or falls under an environmental exception.

The analysis assumes that the United States adopts a cap- and- trade systemand requires importers to purchase emission allowances at the U.S. market price,which seems the likeliest form of border adjustment given current policy dis-cussions. Much of the analysis of the GATT’s nondiscrimination provisionsand environmental exceptions would be the same even if the United States


19. Charnovitz (2003, 144).20. Other exceptions also exist, such as GATT Article XXI’s security exceptions, though only

Article XX is likely to be relevant for the purposes of border adjustments.21. GATT Article III explains: “Any internal tax or other internal charge, or any law, regula-

tion or requirement of the kind referred to in paragraph I which applies to an imported product andto the like domestic product and is collected or enforced in the case of the imported product at thetime or point of importation, is nevertheless to be regarded as an internal tax or other internal charge,or a law, regulation or requirement of the kind referred to in paragraph 1, and is accordingly sub-ject to the provisions of Article III.”

22. As discussed further below, however, a border adjustment may fall outside the scope ofGATT Article III, because border-enforced internal measures can be applied to like “products,”but a requirement to hold emission allowances may be considered a charge not on the “product,”but rather on the process or production method (PPM).

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adopted a carbon tax and imposed a carbon tax on imports. Where importantdifferences in the legal analysis exist, however, those will be noted.

Nondiscrimination Obligations

Even if a border adjustment is accepted as a permissible border- enforcementof an internal measure, the border adjustment must also not violate Article III’s“national treatment” obligation by discriminating against imports or Article I’s “most- favored- nation” obligation by discriminating among importing nations.These two requirements are discussed in turn.

national treatment. Article III:4 requires that the United States accordto imported products “treatment no less favorable than that accorded to likeproducts of national origin in respect of all laws, regulations and requirementsaffecting their internal sale, offering for sale, purchase, transportation, distri-bution or use” (emphasis added). This subsection first discusses the meaningof “like products” and then whether, even if a border adjustment were foundnot to discriminate against “like products,” the amount of the border adjust-ment could be determined in a nondiscriminatory fashion. It concludes bybriefly noting how the foregoing analysis might differ if a domestic cap- and- trade regime were viewed not as an internal regulation, covered by Article III:4,but rather an internal tax, covered by Article III:2.

The principle behind Article III is straightforward: A member cannot treatimported goods worse than domestic goods. In the case of climate change bor-der adjustments, however, this seemingly straightforward principle provesexceptionally difficult to put into effect because the same goods from a globaltrade standpoint may be very different from a climate change standpoint if oneis much more carbon- intensive than the other.

The Appellate Body has explained that whether two products are “like”under Article III:4 is to be determined by whether they are in a “competitiverelationship,”23 and thus a basic industrial product like steel would most likelybe considered “like” other steel, even if they were produced in ways that emit-ted different amounts of carbon. An importer of more carbon- intensive steelmight thus challenge a border adjustment that required it to purchase moreallowances to reflect the higher carbon content by claiming its “like” productwas being treated less favorably. If the U.S. regulation instead imposed anallowance requirement equal to that paid by U.S. manufacturers regardless ofcarbon content (for example, a charge per unit of steel imported), low- carbonproducers (such as those in nations that rely more heavily on nuclear or nat-

Jason E. Bordoff 43

23. WTO, Appellate Body Report on European Communities: Measures Affecting Asbestos andAsbestos-Containing Products, WT/DS135/AB/R, March 12, 2001 [hereafter EC-Asbestos], para-graph 99.

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ural gas) would likely object on the grounds that their products were beingtreated less favorably.

The United States might respond that highcarbon steel is not “like” lower- carbon steel because one contributes more than the other to climate change.Generally speaking, the interpretation of “like” products does not permit dif-ferentiation based on the way a product is made (so- called process and productionmethods, or PPMs), but rather only on the product’s physical characteristics.24

Thus, the Appellate Body found that chrysotile asbestos fibers were not “like”fibers made from other materials given the public health risks of asbestos.25

By contrast, tuna caught in a dolphin- friendly way was “like” tuna caught in a dolphin -unfriendly way.26 Given that steel created in a climatefriendly way isphysically indistinguishable from steel created in a climate- unfriendly way,GATT jurisprudence suggests that a measure that distinguishes like productsbased on how much carbon was emitted in their creation might not fall withinthe scope of Article III.27

The distinction in GATT jurisprudence between a product, on the one hand,and PPM, on the other hand, need not be fatal to a carbon border adjustment’slegality, however. WTO case law suggests that PPM distinctions between likeproducts are most likely not permissible under Article III but may be permit-ted under Article XX.28 Indeed, in the US- Gasoline and US- Shrimp cases, theAppellate Body ruled that PPM restrictions were not necessarily inconsistentwith the GATT because they fell within the scope of Article XX.29

Even if a border adjustment were found not to discriminate between likeproducts, importers would need to pay the same price per ton of carbon emit-ted as domestic producers (through the purchase of allowances in a market) tobe treated “no less favorably.” The problem, however, is that it can be difficultto agree on what price U.S. manufacturers paid to emit a ton of carbon undera domestic cap- and- trade scheme.


24. Matsushita, Schoenbaum, and Mavroidis (2003, 163); Hudec (2000, 187, 191).25. EC-Asbestos AB.26. GATT, United States: Restrictions on Imports of Tuna, GATT BISD (39th Supp.), at 155

(1993), reprinted in 30 ILM 1594 (1991) (unadopted); GATT, United States: Restrictions onImports of Tuna, DS29/R, June 16, 1994, reprinted in 33 ILM 839 (1994) (unadopted).

27. Bhagwati and Mavroidis (2007).28. See Charnovitz (2002); Hudec (2000, 192).29. WTO, Appellate Body Report on United States: Standards for Reformulated and Conven-

tional Gasoline, WT/DS2/AB/R, May 20, 1996 [hereafter US-Gasoline AB], 13–22; WTO,Appellate Body Report on United States: Import Prohibition of Certain Shrimp and Shrimp Prod-ucts, WT/DS58/AB/R, May 15, 1998 [hereafter US-Shrimp AB], paragraphs 141–49; WTO,Appellate Body Report on United States: Import Prohibition of Certain Shrimp and Shrimp Prod-ucts (Implementation under Article 21.5), WT/DS58/RW/AB, November 21, 2001 [hereafterUS-Shrimp Article 21.5 AB], paragraphs 149–52.

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There are several ways in which the economic incidence of allowance costsmay be in dispute, but just consider the widely discussed question of whetherallowances should be auctioned or freely allocated.30 It is often assumed thatto the extent allowances are freely distributed, the price charged to importerswould need to be discounted proportionally.31 The problem with this approach,however, is that regulated entities, say upstream importers or extractors of fos-sil fuels, will still pass on allowance costs to firms and consumers even if theyreceive allowances for free.32 The reason is that allowances, even ones receivedfor free, can be sold for cash in a liquid secondary market and thus there is anopportunity cost to using one to emit a ton of carbon. A GHG emitter will decidenot to sell an allowance only if it can recoup that opportunity cost, which hap-pens by raising prices. In such a scenario, carbon- intensive manufacturers (andtheir customers) would still bear the full market price for emitting carbon, andthus there would be no reason to reduce that price for importers. Indeed, evenif the manufacturers themselves received the free allowances, they would stillpass the opportunity cost of using allowances to emit carbon on to their cus-tomers. As discussed in greater detail below, that is precisely why theCongressional Budget Office and other analysts think that free allowances haveessentially the same effect on emissions and output as auctioned allowances.Thus, it would not disadvantage importers to pay the market price for carboneven if domestic manufacturers received free allowances themselves. That iswhy allowance allocation is a distributional issue that should be separated fromthe issue of compliance obligations under the cap.33

Finally, even if the right price could be determined, that carbon price wouldneed to be imposed as a border adjustment based on the carbon content of theimport, which can be exceptionally complicated to determine. Foreign manu-facturers asked to provide detailed carbon content information may be unwillingto do so, or even unable given increasingly disaggregated global supply chains

Jason E. Bordoff 45

30. Another complication regarding the economic incidence of allowance costs arises in cost-of-service regulated electricity markets. In such markets, the full price of carbon may not be passedon to manufacturers, and thus it would discriminate against foreign imports to charge them themarket price for emissions allowances.

31. See, for example, Pauwelyn (2007, 22).32. See Congressional Budget Office (2003, 2007b). Notably, the incidence of a border adjust-

ment would parallel the incidence of a domestic cap-and-trade program. In a domestic cap-and-traderegime, the statutory incidence would fall on the firms required to surrender allowances at the endof the year, while the economic incidence falls primarily on downstream consumers of energy andfinal products (because the demand for energy is so inelastic). With a border adjustment, the for-eign firm exporting goods to the United States would face the statutory incidence—it wouldactually have to buy the allowances or pay the government-imposed border charge—while the eco-nomic incidence falls mostly on American consumers, who will see the cost of the borderadjustments priced into the final retail price of the goods they buy.

33. Kopp (2007).

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for production.34 In that case, the United States might calculate the border adjust-ment based on external industry- wide benchmarks, as proposed for the U.S.British thermal unit tax in 1993. In US- Gasoline, however, the GATT Panelstruck down a U.S. regulation assigning foreign producers a standard baselinewhile domestic refiners got an individual one.35 In the case of industrial goods,in which the amount of carbon emitted can vary dramatically (depending onsuch factors as the source of energy, such as nuclear versus coal, and the pro-duction process, such as lower- carbon steel mini- mills versus higher- carbonintegrated mills), applying one baseline carbon content to every product regard-less of how and where it was produced may well be considered discriminatory.

Although the above discussion has largely discussed a cap- and- trade sys-tem as a domestic regulation, the WTO might alternatively view it as fallingunder the national treatment requirements of Article III:2, which concerns“internal taxes or other internal charges of any kind” that are applied “directlyor indirectly” on products. The requirement to purchase allowances that forcefirms to internalize the social cost of the carbon they emit may be viewed aseffectively the same as a carbon tax. Indeed, from an economic perspective, ifthere were complete certainty about the costs and benefits of a carbon price,there is little difference between a carbon tax and a cap- and- trade system. Ifthe government were to issue the precise number of permits so that the marketsettled on a value of $15 to emit a ton of carbon, that would be the same as set-ting a $15 per ton carbon tax. In reality, however, there is considerableuncertainty about the costs of climate change and of policies to mitigate it. Quan-tity instruments like cap- and- trade systems provide certainty about how muchemissions will be reduced but uncertainty about the costs, whereas price instru-ments like carbon taxes provide certainty about costs but uncertainty about justhow much emissions will be reduced.

Viewed in this way, the carbon price signal created by requiring the remis-sion of an allowance to emit a ton of carbon might be viewed as equivalent toa tax,36 and the requirement for importers to buy an allowance for the carboncontent of their products may be judged “a charge equivalent to an internaltax.”37 In that case, many of the same questions would exist as to whether a


34. See Krugman (2008). As difficult as it is to determine the carbon content of carbon-intensive manufactured goods, it is vastly more complicated to do so for manufactured goods forconsumption made from those carbon-intensive primary goods, as required in the Manager’s sub-stitute amendment to Lieberman-Warner, Sec. 1311 (7) and (14).

35. The Appellate Body rejected the U.S. defense that data from foreign gasoline producerswas unverifiable, though it agreed with the panel’s suggestion that using a statutory baseline mightbe permissible when “the source of imported gasoline could not be determined or a baseline couldnot be established because of an absence of data.” U.S.-Gasoline AB, 27.

36. See Ismer and Neuhoff (2004, 4–8). 37. GATT Article II:2(a).

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tax on the process or production method (so- called hidden taxes, or taxesoccultes), rather than on inputs incorporated into the final product, may beadjusted at the border.38 Notably, a GATT panel in the US- Superfund case per-mitted the United States to impose a domestic tax on certain chemicals onimports that had used the same chemicals “as materials in the manufacture orproduction” of these imports, though the panel did not address whether thesechemicals had to be physically present in the imported product.39 The specificquestion whether hidden or process taxes may be adjusted at the border, how-ever, was left unanswered by a 1970 GATT working group on the issue.40 Evenif a carbon tax is judged to be adjustable at the border, it would still have tomeet the national treatment obligations of Article III, and many of the con-cerns discussed above would still exist.

most- favored- nation treatment. The second nondiscrimination obli-gation a border adjustment must satisfy is Article I’s “most- favored- nation”requirement, which prohibits discrimination between WTO members. Borderadjustment proposals typically only apply to imports from countries that donot have a comparably effective climate policy already in place, because oth-erwise imports would effectively be paying a carbon price twice. Yet such anapproach would seem to violate Article I because it would be treating two “like”products differently depending on their origin. The United States might arguethat the treatment is nondiscriminatory because the restriction is based not onorigin but on conditions of production that apply equally to all nations, and thatthe treatment differs only because the objective of mitigating climate changeis being met differently in different places.41 Even supporters of border adjust-ments, however, recognize that such a claim would face difficulty.42 Indeed,

Jason E. Bordoff 47

38. For a discussion of these issues, see Pauwelyn (2007, 19–20). 39. GATT, Panel Report on United States: Taxes on Petroleum and Certain Imported Substances,

GATT BISD 34S/136, June 17, 1987, paragraphs 2.5 and 5.2.4.40. “It was generally felt that while this area of taxation was unclear, its importance—as indi-

cated by the scarcity of complaints reported in connection with adjustment of taxes occultes—wasnot such as to justify further examination.” GATT, GATT Working Party Report on Border TaxAdjustments, GATT BISD 18S/97, December 2, 1970, paragraph 15. Pauwelyn (2007, 20–21) pro-vides an argument that a carbon tax should be adjustable at the border.

41. In the Canada-Automobiles decision, for example, the panel suggested that origin-neutralcriteria might be permissible under Article I. WTO, Appellate Body Report on Canada: CertainMeasures Affecting the Automotive Industry, WT/DS139/AB/R, WT/DS142/AB/R, February 11,2000 [hereafter Canada-Automobiles], paragraphs 3.22–3.24. But see WTO, Panel Report onIndonesia: Certain Measures Affecting the Automobile Industry, WT/DS54, 59 and 64/R, July 23,1998, paragraph 14.143, ruling that “GATT case law is clear to the effect that any . . . advantage[here tax and customs benefits] cannot be made conditional on any criteria that is not related tothe imported product itself.”

42. Memorandum from Andrew W. Shoyer, “WTO Background Analysis of International Pro-visions of U.S. Climate Change Legislation,” February 28, 2008 (http://energycommerce.house.gov/cmte_mtgs/110-eaq-hrg.030508.Morris-testimony.pdf [February 2009]).

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Article I covers not only de jure but also de facto discrimination, which theAppellate Body found to exist in the Canada- Automobiles case, even thoughthe challenged measure was facially origin- neutral.43 Because “the MFN [most- favored- nation] obligation under the GATT is unconditional and quite broad,”44

there is good reason to believe the WTO would find a violation if border adjust-ments applied only to certain countries.

Moreover, even if the WTO permitted differential treatment, it would be verydifficult to determine which countries have comparably effective climate poli-cies in a way that did not give rise to discrimination claims. The EuropeanUnion’s cap- and- trade system, for example, covers only half the economy.Many EU member countries that impose carbon taxes have exempted energy- intensive industries.45 Moreover, other nations (like Japan) might eschew marketmechanisms altogether in favor of command- and- control regulations. It is alsopossible to envision ways in which governments could modify their tax systems— effectively doing a corporate tax swap— that would have little or noeffect on emissions but would satisfy an assessment of comparable climate pol-icy burdens. For example, a government could cut excise taxes on fossil fuelswhile imposing a carbon tax. The after- tax cost of using fossil fuels by, say,steel firms would be unchanged, but the country could argue that it has imple-mented a climate policy comparable to that of the United States. In theory, ratherthan divide countries into two groups— those with and without comparablyeffective climate policies— all importers might be required to pay the differ-ence between the U.S. market price for allowances and whatever carbon pricethey paid in their home country. As an administrative matter, however, such anapproach would be massively complex and likely unworkable.

The approach incorporated in the Lieberman- Warner Bill to determinewhether another nation has taken comparable action is to measure GHG emis-sions each year against a baseline. As an initial matter, nations like China orIndia could argue that emissions should be measured by geographical locationof consumption, not production. China, after all, now produces half the world’scement and flat glass and a third of its steel; industry thus accounts for 71 per-cent of energy demand in China, as compared to 31 percent in Europe and 25percent in the United States.46 Leaving aside such normative questions, meas-uring each nation’s emissions against a baseline also ignores that two nationsmay rationally achieve identical long- term reductions according to differentannual emission patterns and from different sectors of the economy. The long-


43. Canada-Automobiles, paragraph 86.44. Matsushita, Schoenbaum, and Mavroidis (2003, 147).45. World Bank (2008, 24).46. Rosen and Houser (2007).

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term cumulative nature of climate change means that the marginal benefits ofreducing GHG emissions vary little from year to year, while the costs mightvary greatly. Thus, it may be economically efficient for a country to make fewercuts in the short term and more in the long term, and annual measures of GHGemissions to determine comparable action would fail to allow for this tempo-ral flexibility. Additionally, determining whether a nation had taken comparablyeffective measures by measuring GHG emissions reductions would fail to takeinto consideration the impact of land use changes and deforestation on climatechange, which account for roughly one- fifth of GHG emissions.47 It also ignoresthat some countries might increase (or decrease) emissions from a given base-line due to changes in population growth or GDP growth or other factors. Forexample, Russia and its former republics have lower emissions than they didin 1990 and thus can easily hit a target such as reducing emissions to or below1990 levels.

Article XX Exceptions

On the basis of the WTO jurisprudence discussed above, there is reason tobelieve that a border adjustment that requires importers of carbon- intensivegoods to purchase allowances at the U.S. market price for the carbon emittedin production might be found to violate the United States’ most- favored- nationtreatment obligations if applied only to countries that do not have comparablyeffective policies. As for the United States’ national treatment obligations, aborder adjustment that charged “like” products differently based on how muchcarbon was emitted in producing each product might be viewed as a prohib-ited PPM restriction. In that case, the border adjustment would then bepermissible only if it satisfied one of the environmental exceptions in ArticleXX of the GATT and then, if it did, whether it was also consistent with theintroductory paragraph (“chapeau”) of Article XX.

The most relevant exceptions are found in Article XX(g) and XX(b). Theexception in Article XX(g) applies to measures “relating to the conservationof exhaustible natural resources if such measures are made effective in con-junction with restrictions on domestic production or consumption.” ArticleXX(b) provides an exception for measures “necessary to protect human, ani-mal or plant life or health.” Because the WTO has found that “relating to” is alower standard to meet than “necessary to,”48 this chapter focuses on the Arti-cle XX(g) exception.

Jason E. Bordoff 49

47. According to the World Resources Institute (2008), in 2000, 23 percent of CO2 emissions(18 percent of all GHG emissions) came from land use change and forestry.

48. See US-Gasoline AB, 14–19.

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article xx(g) exception for “conservation of exhaustible nat-ural resources.” There are three parts to the Article XX(g) analysis, twoof which should be satisfied without much difficulty. A lowcarbon atmosphere,necessary to avoid catastrophic climate change, should be viewed as an“exhaustible natural resource”; although carbon only stays in the atmospherefor around a hundred years, the WTO has previously found that clean air is aresource capable of depletion even if it is renewable.49 A border adjustmentwould also be “made effective in conjunction with restrictions on domestic pro-duction or consumption” if it is part of an overall U.S. cap- and- trade bill.

A more difficult question is whether a border adjustment is “related to” thegoal of mitigating climate change. GATT panels have interpreted “relating to”to mean “primarily aimed at” conservation.50 In US- Gasoline, the AppellateBody found the disputed measure satisfied XX(g) because it had a “substan-tial relationship” to the conservation of clean air.51 In US- Shrimp, XX(g) wassatisfied because the import ban on shrimp harvested without devices to avoidharming turtles while fishing demonstrated a “means and ends relationship”that was “close and real” with the goal of protecting endangered turtles.52 It isless clear whether a border adjustment would satisfy the test of being prima-rily aimed at and substantially related to the goal of reducing GHG emissionswhen estimates suggest the policy might do little to reduce leakage. Indeed, inexplaining why the disputed measures satisfied XX(g), the Appellate Body in US- Gasoline noted that without baselines, the goal of reducing the level of airpollution “would be substantially frustrated.”53 In US- Shrimp, the AppellateBody accepted that turtle excluder devices “would be an effective tool for thepreservation of sea turtles.”54 It is harder to argue that the United States’ goalof mitigating climate change would be less “effective” or “substantially frus-trated” without border adjustments on carbon- intensive imports from certaincountries.55

Conversely, the Appellate Body in those cases did not ask how much of animpact the policy would have on protecting sea turtles, only whether it wouldhave that effect. Similarly, the fact that border adjustments for climate changewould have limited impact on total emissions should not necessarily countagainst them. It is not relevant under XX(g) (as it is under XX(b)) that there


49. US-Gasoline AB, 14.50. US-Gasoline AB, 18–19; GATT, Panel Report on Canada: Measures Affecting Exports of

Unprocessed Herring and Salmon, L/6268, BISD 35S/98, March 22, 1988, paragraphs 4.5–4.6.51. US-Gasoline AB, 19.52. US-Shrimp AB, 141. 53. US-Gasoline AB, 19.54. US-Shrimp AB, 141.55. US-Shrimp AB, 141.

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may be more effective or fewer trade restrictive options available. WTO mem-ber governments retain “a large measure of autonomy to determine their ownpolicies on the environment.”56 Moreover, the Appellate Body has previouslyexplained that XX(g) must be “read . . . in light of contemporary concerns ofthe community of nations about the protection . . . of the environment,”57 andfew issues are of such universal concern at present as climate change.

article xx chapeau. Even if a border adjustment satisfies XX(g), it mustalso be justified under the “chapeau,” or opening clause, to Article XX, designedto prevent provisions that are arbitrary, discriminatory, or protectionist. Thechapeau requires that “measures are not applied in a manner which would con-stitute a means of arbitrary or unjustifiable discrimination between countrieswhere the same conditions prevail, or a disguised restriction on internationaltrade.” Broadly speaking, the purpose of the chapeau is to prevent the “abuseof the exceptions” in Article XX,58 and ensure that they are “exercised in goodfaith to protect interests considered legitimate under Article XX, not as a meansto circumvent one Member’s obligations towards other WTO Members.”59 Thechapeau thus embodies the recognition by WTO members of the need to main-tain a balance between the right to invoke an Article XX exception and thesubstantive rights under the GATT.60 Several of the leading environmental casesunder the WTO have turned on the standards set forth in the chapeau. In US- Gasoline, US- Shrimp, and most recently Brazil- Tyres, for example, theAppellate Body found the offending measure to be provisionally justified byone of the environmental paragraphs of Article XX— either XX(g) or XX(b)—but then found the measure violated the chapeau of Article XX.

The Appellate Body has explained that whether the application of a meas-ure violates the chapeau “should focus on the cause or rationale given for thediscrimination.”61 As a theoretical matter, a full border adjustment levied basedon the carbon- intensity of an import has a plausible rationale consistent withXX(g), namely, to minimize carbon leakage that can undermine the effective-ness of a U.S. cap- and- trade system in lowering GHG emissions. Moreover,excluding nations with comparably effective climate policies from the schemealso has a defensible environmental rationale, which is that those nations arealready taking measures to reduce carbon emissions and thus leakage to themshould be of minimal concern.

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56. US-Gasoline AB, 30.57. US-Shrimp AB, 129.58. US-Gasoline AB, 22.59. WTO, Appellate Body Report on Brazil: Measures Affecting Imports of Retreaded Tyres,

WT/DS332/AB/R, December 3, 2007 [hereafter Brazil-Tyres AB], paragraph 215.60. US-Shrimp AB, 156. 61. Brazil-Tyres AB, 246.

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At the same time, the chapeau addresses the “detailed operating provisions”of the measure at issue and how it is “actually applied.”62 When considerationis given to the administrative complexities and likely implementation, there areat least five possible reasons why a border adjustment, depending on how it isdesigned, may violate the chapeau.

First, as discussed above, a border adjustment on carbon- intensive manu-factured goods from countries that have not taken comparably effective actionto address climate change, as commonly proposed today, would do little toreduce overall leakage and have little environmental benefit. For those carbon- intensive sectors that face competition from Annex II countries, however, suchborder adjustments may help mitigate the adverse effects of a carbon price.63

Yet there is no exception in Article XX for preserving the health of U.S. firms,only the environment, and thus the ostensible purpose for the offending meas-ure must be a “rational connection” to an objective of one of the Article XXparagraphs.64 One leading scholar explains it this way: “It is one thing for theUnited States to demand that the shrimp it imports be caught in a turtle- safeway so as to safeguard turtles. Yet it is an entirely different matter to seek to‘level the playing field’ by insisting that foreign producers use the same pro-duction practices as U.S. shrimpers so as to offset any regulatory cost differencesbetween domestic and foreign producers. This latter motivation should not beshielded by GATT Article XX.”65 A WTO panel, balancing the rights of a mem-ber to invoke an Article XX derogation and the rights of other members,66 maythus find border adjustments to be a form of stealth protectionism given thelarger impact on protecting certain U.S. firms than on reducing overall GHGemissions. Indeed, the Appellate Body recently confirmed that it is acceptableto take into account as a relevant factor the effects of discrimination, not justthe cause or rationale of the discrimination.67

Second, the measure likely will have to permit importers to demonstrate howmuch carbon they emitted individually and pay for allowances on that basis.The current provision in the Lieberman- Warner Bill, for example, does not dothat. Rather, it prescribes a particular formula used to determine the allowancerequirement for a category of covered goods in a covered foreign country.68


62. US-Shrimp AB, 160.63. See US-Shrimp AB, notes 4–18. As Charnovitz (2002, 148) has noted in the context of cli-

mate change policies, “while one can easily see a competitiveness rationale to use a border taxadjustment, it is difficult to visualize a valid environmental reason under GATT Article XX in sup-port of a border adjustment.”

64. Brazil-Tyres AB, 227.65. Charnovitz (2002, 106). 66. See US-Shrimp AB, 156.67. Brazil-Tyres AB, 230.68. ACSA, Title VI, Sec 6001(d).

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Manufacturers in that category would thus have the same allowance require-ment regardless how much carbon each actually emitted in production. Sucha provision may be ruled arbitrary and unjustifiable discrimination, just as thebaseline establishment method in US- Gasoline was found to be because domes-tic refiners were permitted to establish an individual baseline while foreignrefiners had to accept the Environmental Protection Agency’s statutory base-line. Moreover, use of a nationwide calculus for carbon content actually weakensthe ostensible climate benefits of the border adjustment. Foreign firms will havelittle incentive to reduce the carbon footprint of their products if doing so wouldnot change the way their products are treated at the border (though the incen-tive for government action may still exist).

Third, the United States cannot require an exporting country to implement amarket mechanism, but it must allow flexibility for nations to pursue otherapproaches “comparable in effectiveness.”69 The Appellate Body has interpreted“arbitrary or unjustifiable discrimination” to preclude requiring essentially thesame program as the United States puts in place to address climate change.70

As a practical matter, this may significantly mute the impact of border adjust-ments. As discussed above, it is difficult to judge the efficacy of climate changepolicies in the short term, and thus other nations might argue that a variety of policies— from command- and- control regulations to the sort of voluntary tar-gets adopted in Japan— should be viewed as comparably effective.

Fourth, the U.S. program must take “into consideration different conditionswhich may occur” in different countries.71 Failure to do so may constitute“arbitrary discrimination,” according to the Appellate Body.72 In that regard,the WTO might consider the relevance of developed countries’ greater histor-ical responsibility for cumulative carbon emissions and higher current emissionsper capita. In that case, there is a possibility the WTO would find that even aborder adjustment applied equally to domestic and imported goods is non-compliant.

Fifth and finally, the Appellate Body’s interpretation of the chapeau requiresthat before imposing a border adjustment, the United States must engage in“serious, across- the- board negotiations” with other nations that might be sub-ject to the border adjustments.73 Although the United States must make

Jason E. Bordoff 53

69. US-Shrimp, Article 21.5 AB, 137–44. It is also worth noting that a trade mechanism thatrequires comparability in form as well as burden runs counter to the Framework Convention onClimate Change and the Kyoto Protocol, which provides discretion to countries on how they imple-ment their climate change policy goals.

70. US-Shrimp, Article 21.5 AB, 144. 71. US-Shrimp, Article 21.5 AB, 164.72. US-Shrimp, Article 21.5 AB, 164, 165, 177.73. US-Shrimp, Article 21.5 AB, 166-71.

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goodfaith efforts to reach agreement, failure to do so will not constitute dis-crimination.74 If the United States were not to undertake such negotiations, orthe WTO were to view the efforts as insufficiently “serious,” that might leadto a finding that the border adjustment is arbitrary and discriminatory.75

The Alternative of Free Allocation

Questions about the WTO legality of border adjustments, combined withconcerns about tit- for- tat trade retaliation and their small impact on reducingleakage, may caution against their use. Yet, as a practical matter, some meas-ures may be necessary in a U.S. cap- and- trade law to address potential adverseeffects on domestic manufacturers. In response to this political imperative, somehave proposed compensating adversely affected sectors in the United Statesthrough the free allocation of emission allowances.76 Though the topic of freeversus auctioned allocation has attracted considerable attention as a policymatter, to date little attention has been given to the question whether free allo-cation, too, might be noncompliant with WTO law as an illegal subsidy. Asdiscussed below, to the extent it is compliant, that may only be precisely forthe same reasons it is not likely to be good policy.

Under the WTO Agreement on Subsidies and Countervailing Measures, freeallocation would be a subsidy subject to remedies under the agreement if it (1)were a “financial contribution” by the government, (2) conferred a “benefit,”and (3) were “specific” to certain industries or sectors.77 If these elements aresatisfied, the subsidy may be inconsistent with WTO law if it also causesadverse effects to other WTO members.78


74. US-Shrimp, Article 21.5 AB, 115–24.75. Efforts to undertake “serious, across-the-board negotiations” before the imposition of a

border adjustment may be complicated by the most recent Senate climate change bill’s reductionfrom eight years to two years the delay between the start of the domestic cap-and-trade programand the start of the international allowance program. Sec. 1315.

76. See, for example, Pew Center on Global Climate Change (2008).77. WTO, “Agreement on Subsidies and Countervailing Measures,” Articles 1.1, 1.2.78. WTO, “Agreement on Subsidies and Countervailing Measures,” Article 5. In addition to

being an “actionable” subsidy if it causes adverse effects, a claim might also be made that it con-stitutes a “prohibited” export-contingent subsidy, which is forbidden per se. World TradeOrganization, “Agreement on Subsidies and Countervailing Measures,” Article 3. Though a sub-sidy may be prohibited if it is contingent de facto or de jure on export (Appellate Body Report onCanada: Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/R, August 2, 1999,paragraph 167), export orientation alone is not enough; the subsidy must be “in fact tied to actualor anticipated exportation or export earnings.” World Trade Organization, “Agreement on Subsi-dies and Countervailing Measures,” n. 4. Free allocation to carbon-intensive industries is unlikelyto meet that test.

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First, free allocation of allowances should be considered a financial contri-bution, which is defined, among other ways, as the “direct transfer of funds,such as grants, loans and equity infusions.”79 Though it might be argued thatfree allowances do not constitute the “direct transfer of funds,” they are “func-tionally equivalent to distributing cash,” according to the Congressional BudgetOffice (CBO), because allowances can be sold for monetary value in a liquidsecondary market, created and enforced by the government.80 Indeed, that iswhy the recipients of allowances need not be the same entities regulated by thecap. In recognition of the financial value of free allowances, the CBO recentlyscored free allocation as both a revenue increase and outlay increase. As thethen–CBO director, Peter Orszag, explained, “Distributing allowances at nocharge to specific firms or individuals is, in effect, equivalent to collecting rev-enue from an auction of the allowances and then distributing the auctionproceeds to those firms or individuals.”81

Second, if free allowances are a “direct transfer of funds” qualifying as afinancial contribution by the government, it should be readily agreed that theyalso confer a benefit. “If a government gives a sum of money to a company, itseems clear that this financial contribution would generally confer a benefit.”82

Third, a subsidy is “specific” when it is provided to a specific industry orenterprise but not when it is widely available within an economy.83 To the extentfree allowances are targeted at specifically defined sectors adversely affectedby a carbon price, they would likely be considered specific. Conversely, if allallowances were distributed based on objective criteria, like historical emis-sions, it would be harder to prove that the subsidies were specific.84 Even if asubsidy is de jure nonspecific, however, it can still be de facto specific if, forexample, certain enterprises benefit disproportionately.85

Finally, for the program to be an “actionable” subsidy, it must cause “adverseeffects” to the interests of another WTO member.86 The most likely way in whichfree allocation may be found to do so would be if it caused “serious prejudice,”notably because the “subsidy displaces or impedes imports of a like productof another Member in the market of the subsidizing Member.”87

Jason E. Bordoff 55

79. WTO, “Agreement on Subsidies and Countervailing Measures,” Article 1.1(a)(1)(i).80. Congressional Budget Office (2007a).81. Orszag (2008).82. Van den Bossche (2005, 557).83. WTO, “Agreement on Subsidies and Countervailing Measures,” Article 2.84. WTO, “Agreement on Subsidies and Countervailing Measures,” n. 2.85. WTO, “Agreement on Subsidies and Countervailing Measures,” Article 2.1(c).86. WTO, “Agreement on Subsidies and Countervailing Measures,” Article 5.87. WTO, “Agreement on Subsidies and Countervailing Measures,” Article 6.3(a).

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Although free allocation may appear, at first glance, to harm other WTOmembers by reducing costs for domestic producers, in fact free allocationshould not change a firm’s pricing and output decisions, and thus foreign firmsshould not see their sales reduced by artificially suppressed prices for U.S.goods. As discussed above, free allocation of allowances does not exempt firmsfrom the carbon price signal created by a cap- and- trade system. Rather, it is atransfer of resources from the government to the recipients. Even if firms receiveallowances for free, they will still pass along the opportunity cost of using thoseallowances to their customers in the form of higher prices.88 Indeed, in Europe,which gave allowances away for free, consumers still saw electricity prices riseand fall with the market value of allowances, while firms reaped windfall profits.As prices increase, demand falls, and the firm’s output is reduced accordingly.89

How much output is reduced should not differ depending on whether allowancesare auctioned or freely distributed. Firms set prices based on market forces,such as marginal costs and demand, that do not change even if firms receive acash transfer from the government. This economic effect of free allocation isparticularly important to recognize in considering how to protect U.S. indus-try, because free allocation will increase firms’ profits, which ultimately accrueto shareholders, but will not prevent production declines and concomitant joblosses in affected sectors.90 Free allocation thus may not adversely affect otherWTO members or be illegal under WTO law— though precisely because itwould be ineffective in protecting U.S. industries or workers (though it wouldcompensate shareholders). Even if output and pricing decisions are unchanged,however, WTO members may claim they suffered “serious prejudice” if freeallocation provides firms with resources to invest in research and development(R&D) or new products, prevents exit from the market, or has other indirectbenefits.

It is worth noting that whether free allocation has adverse effects on importersmay depend on the formula used for the allocation and updating of allowances.For example, “output- based allocation,” which some analysts have proposed,91

would affect the pricing and output decisions of firms.92 This approach would


88. See Congressional Budget Office (2007b, 1; 2003).89. For estimates of output reductions from a carbon charge, see Morgenstern and others

(2007).90. See, for example, Orszag (2008): “Because the additional profits from the allowances’ value

would not depend on how much a company produced, such profits would be unlikely to preventthe declines in production and resulting job losses that the price increases (and resulting drop indemand) would engender.”

91. Fischer and Fox (2004); Fischer, Hoffmann, and Yoshino (2002). Under output-based allo-cation, a certain number of allowances are allocated to certain sectors, and within each sector eachfirm would receive a number of permits proportional to its share of the sector’s output.

92. In addition to the legal issues, by not allowing the carbon price signal to be passed through

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be the functional equivalent of auctioning off allowances and then using therevenue to subsidize production. Indeed, some proposals on Capitol Hill makethis explicit, rebating firms in cash for the average carbon costs (from the pur-chase of allowances and higher electricity prices) associated with output in their sector— thus preserving some incentive to reduce energy intensity relative tothe sector average. With output- based allocation or rebating, output would thusbe reduced less than would be the case absent the production subsidy— therebygiving rise to claims of “serious prejudice” by other WTO members.93 In short,the more effective free allocation is in protecting employment and output inadversely affected sectors, the more likely it may be to violate WTO law. Iffree allocation were found to be a subsidy inconsistent with WTO law, theadversely affected WTO member might seek the right to retaliate against U.S.products imported to that country if the free allocation were not removed.94

In response to a claim by a WTO member that free allocation constituted anillegal subsidy, the United States might respond in its defense that the WTOAgreement on Subsidies and Countervailing Measures permits certain envi-ronmental adaptation subsidies, and that free allocation of permits falls withinthat provision as a subsidy to help manufacturers adjust to the effects of cli-mate policy.95 Although this provision expired in 2000, the United States might

Jason E. Bordoff 57

in the form of higher prices, output-based allocation is a less efficient way to reduce emissionsbecause it reduces conservation incentives and instead increases reliance on lowering energy inten-sity. Conversely, its proponents argue that output-based allocation would reduce leakage, mitigateadverse effects on employment in the affected sector, and reduce negative effects on the real wageby mitigating price increases of energy-intensive goods.

93. In its defense, the United States might argue that output-based allocation is not a net sub-sidy once the impact of the cap-and-trade system is considered, so importers are not adverselyaffected relative to the business-as-usual scenario of no U.S. climate change regulation. In response,the complaining WTO member might make two points. First, it is theoretically possible for firmsto receive a net subsidy under output-based allocation if the sector-level allocations are based onhistorical emissions shares but a given sector or subsector does relatively more than others to reduceemissions. Second, the member might argue that the measure being disputed as an actionable sub-sidy is not the U.S. climate regulation (including the allocation method), but rather output-basedallocation itself. Under a cap-and-trade system, the economy as a whole would face higher costsfrom the domestic climate regulation, but output-based allocation would be a way to offset part ofthose costs for a certain subset of industries—in a way that induces higher output and thus mightharm importers. In that way, exempting certain sectors from regulatory costs (and concomitantGHG reductions) that would otherwise exist may be viewed by the WTO as similar to “forgoing”revenue “otherwise due,” which is a financial contribution under Article I of the “Agreement onSubsidies and Countervailing Measures.” When a regulation applies to the entire economy, butonly certain sectors receive a subsidy that mutes the regulation’s impact, the WTO may find thatthe benchmark against which to evaluate whether a member has been adversely affected is theabsence of the disputed method of allocation, not the absence of the entire regulatory program.

94. WTO, “Agreement on Subsidies and Countervailing Measures,” Articles 10–11. In addi-tion, the affected foreign industry might consider bringing a countervailing duty case under itsdomestic trade laws.

95. WTO, “Agreement on Subsidies and Countervailing Measures,” Article 8.2(c).

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argue that the environmental exceptions to which negotiators agreed in 1995are still justified today. Yet even if the WTO were to agree that the environ-mental exceptions existed notwithstanding their expiration, free allocation ofpermits is unlikely to fall within the narrow scope of the exceptions. The sub-sidy must provide “assistance to promote adaptation of existing facilities tonew environmental requirements imposed by law and/or regulations whichresult in greater constraints and financial burden on firms,”96 but free alloca-tion is a cash transfer that firms may use to “green” their facilities or may investin other more profitable ventures or may distribute as profits to shareholders.Further, environmental adaptation subsidies must be a one- time subsidy,97

whereas free allocation is likely to take place annually. The subsidies must belimited to 20 percent of the adaptation costs, yet most proposals to compen-sate carbon- intensive sectors propose much larger subsidies.98 The subsidiesalso must be “directly linked to and proportionate to a firm’s planned reduc-tion of nuisances and pollution,” but, as noted, free allocation is effectively acash transfer that creates no obligation to invest in cleaner production. Funda-mentally, the problem is that the provision for environmental adaptationsubsidies was written to address the costs of complying with command- and- control regulations, like improved pollution and efficiency standards, but isinapposite to a market mechanism like a carbon price created by a cap- and- trade regime.

Conclusion

As explained in this chapter, the consistency of border adjustments with WTOlaw is in doubt and may come down to whether the WTO panel finds the meas-ure to be a genuine effort to protect the environment or a form of stealthprotectionism. The alternative of free allocation may be more WTO compli-ant, though only because it should not boost output from affected industries.Free allocation of allowances, however, does represent a large cash transfer todomestic firms, while doing little to reduce job loss in affected sectors. To some


96. WTO, “Agreement on Subsidies and Countervailing Measures,” Article 8.2(c).97. WTO, “Agreement on Subsidies and Countervailing Measures,” Article 8.2(c)(i).98. Several studies, for example, found that free distribution of around 20 percent of allowances

would be sufficient to compensate primary energy producers and electric power generators. SeeSmith, Ross, and Montgomery (2002); Burtraw and Palmer (2006); and Burtraw and others (2002).A subsidy of 20 percent of total costs would thus require free allocation of only 4 percent ofallowances, whereas Lieberman-Warner proposed freely allocating about 30 percent of allallowances each year in its first ten years to owners of manufacturing, fossil fuel–fired electricitygenerators, petroleum refiners, and natural gas processors.

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extent, such job loss is an inevitable consequence of reduced demand for carbon- intensive goods, which is a key purpose of a carbon price signal. Rather thanbenefit shareholders with free allocation, a better approach would be to auc-tion allowances and use some of the revenue to assist workers transition— perhaps to “greener” jobs that new investment incentives will create, througha sort of “carbon price displacement assistance” program. In addition, auctionrevenue can offset the distributional impact of a carbon price through progressivetax policy, reduce other distortionary taxes, and permit greater investment inenvironmental R&D. In short, the expected environmental benefit of borderadjustments for carbon- intensive manufactured goods is likely to be quite smallcompared with the trade and WTO risks they pose, and any adverse effects onemployment in affected carbon- intensive industries due to the lack of a borderadjustment can be mitigated through the well- targeted use of allowance auc-tion revenue. It is also important to point out that the costs to industry ofcomplying with climate policy in the first place can be minimized by using a cost- efficient market mechanism, such as a cap- and- trade system or carbon tax.

Ultimately, all the problems and challenges associated with measures toaddress competitiveness and leakage reinforce the truly global nature of cli-mate change and the limited ability of any one country to address it unilaterally.International engagement is thus critical to mitigate climate change, and a newpost–Kyoto Protocol international architecture will be needed in this regard.99

Achieving this goal is complicated, however, by considerations of economicefficiency, which requires low- cost abatement in the developing world, and dis-tributional equity, which demands action from rich nations historicallyresponsible for emitting GHGs. Until a truly international approach is adopted,it is critical that the United States, at long last, show real leadership and adoptserious unilateral measures to curb GHG emissions, while high- income coun-tries take collective steps to assist the rest of the world in reducing its emissions.

Jason E. Bordoff 59

99. See, generally, Aldy and Stavins (2007); and Stern and William Antholis (2007).

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Comment

Comment by Andrew W. Shoyer

In chapter 2, Jason Bordoff discusses the risk that any “border adjustment”included as a component of U.S. climate change legislation would be rulednoncompliant with World Trade Organization (WTO) requirements. As a thresh-old matter, the use of the term “border adjustment” is unfortunate and somewhatmisleading in this context, because it has no precise meaning in internationaltrade law, in contrast to the term “border tax adjustment.”1

However, at least one proposal that Bordoff would consider a border adjustment— the international reserve allowance program proposed initially bythe chief executive officers of the International Brotherhood of Electrical Work-ers and American Electric Power,2 and reflected most recently in Title XIII,Subtitle A, of Senator Barbara Boxer’s “Manager’s Amendment” to S 30363—was designed to be WTO compliant. It would apply to imports, such as carbon- intensive products, the same type of measures that would apply undera cap- and- trade program to U.S. producers. And it would apply these meas-ures to imports from countries that are major emitters of greenhouse gases(GHGs) and that had failed to take action comparable in impact to that of theUnited States to reduce these emissions. But the ultimate goal of the programis that the import measures never take effect— that the leverage offered to U.S.negotiators equipped with the credible threat of WTO- compliant measures willinduce large emitters to take effective action promptly on their own and throughinternational negotiations to limit emissions.

The underlying assumption of the international reserve allowance programis that the United States would enact mandatory GHG emissions reductions—

1. See, for example, “Report of the Working Party on Border Tax Adjustments, Adopted by theGATT 1947 Contracting Parties on December 2, 1970,” L/3436, BISD 18S/97.

2. Morris and Hill (2007).3. Senate Amendment 4825, Cong. Rec. S5049, S5091–95, June 4, 2008 [hereafter Manager’s

Amendment].

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in the form of a cap- and- trade system— before it and other countries concludedand put in place a post–Kyoto Protocol agreement. As described in the Man-ager’s Amendment to S 3036, the U.S. government would, upon entry into forceof cap- and- trade legislation, notify all other countries of the U.S. annual GHGemissions caps.4 The U.S. government would then negotiate with GHG- emittingcountries to secure internationally agreed- on disciplines on emissions.5 Theinternational reserve allowance program is targeted at exports from those coun-tries that do not take “comparable action” to that taken by the United States.6

The U.S. government would begin to measure on an annual basis the reduc-tion of emissions under the U.S. cap and use those data to determine whetherand to what extent other countries had taken “comparable action.” The deter-mination of whether a country had taken such action would be based, therefore,on the impact of a country’s regulation on emissions rather than the preciseform of the regulatory program used to achieve those effects.7 The U.S. gov-ernment would focus its determination on those countries that contribute mostto global emissions— least developed countries and countries with less than ade minimis volume of emissions would be excluded from the internationalreserve allowance requirements.8

If the U.S. government determined that a country did not take comparableaction, then an importer of certain goods (for example, carbon- intensive goods,such as steel and aluminum) from that country would be required to provideallowances to the U.S. government corresponding to the GHGs emitted whenthe imported goods were produced in the country of origin.9 The U.S. govern-ment would use an adjustment factor in setting the number of allowancesrequired for imported goods.10 This adjustment factor would reflect the portionof allowances that domestic producers receive at no cost in relation to theallowances that domestic producers procure by auction.11 The adjustment fac-tor would also reflect the conditions prevailing in different countries. The U.S.government would permit importers to satisfy their obligations using allowances(and credits) generated under the cap- and- trade systems of other countries, orusing “international reserve” allowances sold by the U.S. government at the

Comment on Chapter 2 61

4. Manager’s Amendment, §1303(c).5. Manager’s Amendment, §1303.6. Senate Amendment 4825, sections 1301(4), 1305, Cong. Rec. S5049, S5091–92, June 4,

2008.7. Senate Amendment 4825, sections 1301(4), 1305, Cong. Rec. S5049, S5091–92, June 4,

2008.8. Manager’s Amendment, §1306(b)(2).9. Manager’s Amendment, §1306(c).10. Manager’s Amendment, §1306(d).11. Manager’s Amendment, §1306(d)(4).

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prevailing price of U.S. cap- and- trade allowances.12 There would be no limitto the number of international reserve allowances made available for purchaseby importers, and these international reserve allowances could not be used byU.S.-regulated entities to satisfy their obligations under the U.S. cap- and- tradesystem.13

In chapter 2, Bordoff is careful not to draw conclusions about the legalityunder the WTO of any particular proposal. It is noteworthy, however, asdescribed below, that the international reserve allowance program is designedto fall within the exception of the WTO General Agreement on Tariffs and Trade(GATT) for measures related to the conservation of exhaustible naturalresources, by

—securing a close “ends- means” relationship with the overall environmen-tal objectives of the cap- and- trade program;

—implementing measures in conjunction with limitations on U.S. produc-tion, in an “evenhanded” fashion, so that foreign goods are not treated worsethan domestic goods;

—adjusting import requirements to take into account different conditionsamong countries;

—allowing time for goodfaith negotiating efforts with all affected coun-tries; and

—allowing time to measure U.S. emissions reductions before requiringimporters to secure allowances.

Each of these elements is discussed in turn.The program provides a real solution to the conservation objective of reduc-

ing GHG emissions. GATT Article XX(g) provides a general exception to theGATT’s substantive obligations only for those government measures that are“primarily aimed at” the conservation of exhaustible natural resources. In itsUS- Shrimp decision,14 the WTO Appellate Body recognized that a governmentmeasure was primarily aimed at the conservation of an exhaustible naturalresource if “a close and genuine relationship of ends and means” exists betweenthe measure and the conservation objective.15 Under the international reserveallowance program, importers could meet the requirements by providingallowances from recognized cap- and- trade programs outside the United States,


12. Manager’s Amendment, §1306(e).13. Manager’s Amendment, §1306(a)(7).14. See WTO, Appellate Body Report on United States: Import Prohibition of Certain Shrimp

and Shrimp Products, WT/DS58/AB/R, November 6, 1998, DSR 1998:VII, 2755 [hereafter US-Shrimp AB]; WTO, Appellate Body Report on United States: Import Prohibition of Certain Shrimpand Shrimp Products— Recourse to Article 21.5 of the DSU by Malaysia, WT/DS58/AB/RW,November 21, 2001, DSR 2001:XIII, 6481 [hereafter US- Shrimp 21.5 Proceedings AB].

15. US- Shrimp AB, paragraph 136.

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or by securing international reserve allowances from the U.S. government, bothof which are designed to reflect actual GHG emissions abroad. In contrast, acarbon tax on imports would have no direct relationship to the reduction ofemissions abroad.

The program, which would place restrictions on the importation of certainforeign products, is implemented in parallel with restrictions on domestic pro-duction. GATT Article XX(g) applies “if such measures are made effective in conjunction with restrictions on domestic production or consumption”—language that the WTO Appellate Body has interpreted as requiring “even-handedness.”16 In other words, as explained by the Appellate Body inUS- Gasoline,17 restrictions on imported products must be “promulgated orbrought into effect together with restrictions on domestic production or con-sumption of natural resources.”18 However, the Appellate Body also made clearin its US- Gasoline decision that GATT Article XX(g) does not require “iden-tical treatment of domestic and imported products.”19

The program is structured to take into consideration the different conditionsthat may exist in affected exporting countries. According to the Appellate Bodyin US- Shrimp, the chapeau of GATT Article XX requires that a governmentmeasure “be designed in such a manner that there is sufficient flexibility to takeinto account the specific conditions prevailing in any exporting Member.”20 Incontrast, a single carbon- intensity standard for all products in a particular sec-tor could not meet this requirement. In its US- Shrimp decision, the AppellateBody found unacceptable government measures that “require other [WTO]Members to adopt essentially the same comprehensive regulatory program, toachieve a certain policy goal, as that in force within that Member’s territory,without taking into consideration different conditions which may occur in theterritories of those other Members.”21 Moreover, the Appellate Body has founda government measure that “condition[s] market access on the adoption of aprogramme comparable in effectiveness” (versus the same program) satisfiesthe chapeau’s requirements because the measure permits sufficient flexibilityin its application.22


16. US- Gasoline AB, 20–21; US- Shrimp AB, paragraphs 144–45.17. WTO, Appellate Body Report on United States: Standards for Reformulated and Conven-

tional Gasoline, WT/DS2/AB/R, May 20, 1996, DSR 1996:I, 3 [hereafter US- Gasoline AB]; WTO,Panel Report on United States: Standards for Reformulated and Conventional Gasoline, WT/DS2/R,May 20, 1996, as modified by WTO, Appellate Body Report, WT/DS2/AB/R, DSR 1996:I, 29[hereafter US- Gasoline Panel].

18. US- Gasoline AB, 18.19. US- Gasoline AB, 21.20. US- Shrimp 21.5 Proceedings AB, paragraph 149.21. US- Shrimp AB, paragraph 164.22. US- Shrimp 21.5 Proceedings AB, paragraph 144.

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The program provides sufficient time for the U.S. government to engage inserious negotiations with all affected countries to curb GHG emissions beforethe international allowance requirement would enter into effect. The Appel-late Body rejected the government measure at issue in US- Shrimp in partbecause of “the failure of the United States to engage the appellees, as well asother Members exporting shrimp to the United States, in serious, across- the- board negotiations with the objective of concluding bilateral or multilateralagreements for the protection and conservation of sea turtles, before enforcingthe import prohibition against the shrimp exports of those other Members.”23

Moreover, in US- Shrimp, the Appellate Body found a violation of the anti- abuseprovisions in the chapeau because “the United States negotiated seriously withsome, but not with other Members” that were similarly situated.24

To be clear, the Appellate Body has not interpreted GATT Article XX asrequiring that a WTO member government negotiate with other governmentsbefore it imposes an environmental measure. Rather, the chapeau of ArticleXX requires nondiscrimination, so that if a WTO member government choosesto negotiate with some countries that would be affected by a measure, it mustnegotiate with all such countries.

The United States is already negotiating climate issues with other nations,and it will discuss the application of the international allowance provision withsome of the other nations that are affected by it. To meet the GATT Article XXcriterion, therefore, the United States will be obligated to negotiate with all thecountries to which the provision will be applied (but not those exempted fromthe measure), because it will be negotiating with some of them.

The United States is not required to conclude negotiations— only to makeserious, goodfaith efforts with all (approximately thirty) affected countries.The negotiations could commence immediately upon passage of the legisla-tion and its enactment into law. Thus, the requirement to negotiate does notaffect the date on which the allowance requirement would be imposed onimports from affected countries.

The program imposes the international allowance requirement on importsafter the cap- and- trade requirements would apply to domestic production, sothat importers are provided in advance with the standard of comparability ofaction. In US- Tuna I,25 the GATT 1947 Panel noted (in an unadopted report)that because the United States had “linked the maximum incidental dolphin- taking rate which Mexico had to meet during a particular period in order to be


23. US- Shrimp AB, paragraph 166.24. US- Shrimp AB, paragraph 172.25. GATT, Panel Report on United States: Restrictions on Imports of Tuna, DS21/R, GATT

BISD 39S/155 [hereafter Tuna I], circulated September 3, 1991; not adopted.

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able to export tuna to the United States to the taking rate actually recorded forUnited States fisherman during the same period,” the “Mexican authorities couldnot know whether, at a given point of time, their conservation policies con-formed to the United States conservation standards.”26 The panel concludedthat “a limitation on trade based on such unpredictable conditions could not beregarded as being primarily aimed at the conservation of dolphins.”27

Under the international reserve allowance program, the U.S. president wouldbe required immediately upon enactment to notify other countries of annualU.S. emission caps specified in the legislation, providing a predictable stan-dard several years in advance with respect to which foreign countries wouldadjust their GHG emissions regulations. But the allowance requirement wouldbe applied on imports only after the U.S. government measured emissionsreduction in the United States and provided that standard of “comparability”to producers in and importers from affected countries. Under WTO jurispru-dence, the United States must apply the measure to affected countries in an“evenhanded” manner as compared with the manner in which it is applied toU.S. production or consumption.28 If the United States requires concrete veri-fication and measurable results in exporting countries, it will be difficult forthe United States to justify not doing so with respect to the results achieveddomestically under the cap. Conversely, if the United States were to apply theallowance requirement on imports immediately upon the application of the capinside the United States, without any measurement or verified results of GHGemissions reductions, then “evenhandedness” would appear to require theUnited States to treat affected foreign countries in a similar fashion— withoutany measurement or verification of GHG emissions abroad.


26. Tuna I, paragraph 5.28.27. Tuna I, paragraph 5.28.28. US- Gasoline AB, 20–21; US- Shrimp AB, paragraphs 144–45.

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Smith, Anne E., Martin T. Ross, and W. David Montgomery. 2002. Implications for Trad-ing Implementation Design for Equity- Efficiency Trade- Offs in Carbon PermitAllocations. Washington: Charles River Associates.

Stern, Todd, and William Antholis. 2007. “A Changing Climate: The Road Ahead for theUnited States.” Washington Quarterly, Winter 2007–8, 175–88.

Stiglitz, Joseph E. 2006a. Making Globalization Work. New York: W. W. Norton.———. 2006b. “A New Agenda for Global Warming.” Economists’ Voice 3, no. 7, arti-

cle 3.Van den Bossche, Peter. 2005. The Law and Policy of the World Trade Organization. Cam-

bridge University Press.World Bank. 2008. International Trade and Climate Change: Economic, Legal, and Insti-

tutional Perspectives. Washington.World Resources Institute. 2008. “Climate Analysis Indicators Tool” (http://cait.wri.org

[March 2009]).


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Addressing the Leakage/Competitiveness Issue in Climate Change Policy Proposals

Of all the daunting obstacles faced by the effort to combat global climatechange, the problem of leakage is perhaps the most recent to gain serious

attention from policy makers. Assume that a core of rich countries is able toagree for the remainder of the century on a path of targets for emissions ofgreenhouse gases (GHGs), following the lead of the Kyoto Protocol, or to agreeon other measures to cut back on emissions, and that the path is aggressiveenough at face value to go some way toward achieving the GHG concentrationgoals that environmental scientists say are necessary. Will global emissions infact be reduced? Even under the business- as- usual scenario— that is, the pathalong which technical experts forecast that countries’ emissions would increasein the absence of a climate change agreement— most emissions growth wasexpected to come from China and other developing countries. If these nationsare not included in a system of binding commitments, global emissions willcontinue their rapid growth. But the problem is worse than that. Leakage meansthat emissions in the nonparticipating countries would actually rise above wherethey would otherwise be, thus working to undo the environmental benefits ofthe rich countries’ measures. Furthermore, not wanting to lose “competitive-ness” and pay economic costs for minor environmental benefits, the richcountries could lose heart and the entire effort could unravel. It is important tofind ways to address concerns about competitiveness and leakage, but withoutundue damage to the world trading system.

69

J E F F R E Y A . F R A N K E L 3

The author would like to acknowledge useful input from Joe Aldy, Lael Brainard, ThomasBrewer, Steven Charnovitz, Juan Delgado, and Gary Sampson. He would further like to thank forsupport the Sustainability Science Program, funded by the Italian Ministry for Environment, Landand Sea, at the Center for International Development at Harvard University.

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Developing Countries, Leakage, and Competitiveness

We need the developing countries inside the emissions control program, forseveral reasons.1 As noted, these countries will be the source of the big increasesin GHG emissions in coming years, according to the business- as- usual path.China, India, and other developing countries will represent up to two- thirds ofglobal carbon dioxide emissions over the course of this century, vastly exceed-ing the expected contribution of countries belonging to the Organization forEconomic Cooperation and Development of roughly one- quarter of globalemissions. Without the participation of major developing countries, emissionsabatement by industrial countries will not do much to mitigate global climatechange.

If a quantitative international regime is implemented without the develop-ing countries, their emissions are likely to rise even faster than the business- as- usual path, due to the problem of leakage. Leakage of emissions could comeabout through several channels. First, the output of energy- intensive industriescould relocate from countries with emissions commitments to countries with-out. This could happen either if firms in these sectors relocate their plants tounregulated countries, or if firms in these sectors shrink in the regulated coun-tries while their competitors in the unregulated countries expand. A particularlyalarming danger is that a plant in a poor, unregulated country might use dirtytechnologies and thus emit more than a plant producing the same output wouldhave in a high- standard, rich, regulated country, so that aggregate world emis-sions would actually go up rather than down!

Another channel of leakage runs via world energy prices. If participatingcountries succeed in cutting back their consumption of coal and oil, the highcarbon fossil fuels, demand will fall and the prices of these fuels will fall onworld markets (other things equal). This is equally true if the initial policy isa carbon tax that raises the price to rich- country consumers as if it comes viaother measures. Nonparticipating countries would naturally respond to declinesin world oil and coal prices by increasing consumption.

Estimates vary regarding the damage in tons of increased GHG emissionsfrom developing countries for every ton abated in an industrial country. But an


1. An additional reason we need developing countries inside the cap-and-trade system is to givethe United States and other industrial countries the opportunity to buy relatively low-cost emis-sions abatement from developing countries, which is crucial to keep low the economic cost ofachieving any given goal in terms of concentrations. This would increase the probability that indus-trial countries comply with the system of international emissions commitments. Elaboration isavailable from Aldy and Frankel (2004), Frankel (1998, 2005c, 2007), Seidman and Lewis (2009),and many other sources.

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authoritative survey concludes “Leakage rates in the range 5 to 20 per cent arecommon.”2

Even more salient politically than leakage is the related issue of competi-tiveness: American industries that are particularly intensive in energy or other GHG- generating activities will be at a competitive disadvantage to firms in thesame industries operating in nonregulated countries.3 Such sectors as alu-minum, cement, glass, paper, chemicals, iron, and steel will point to real costsin terms of lost output, profits, and employment.4 They will seek protectionand are likely to get it.

The policy response to fears of leakage and competitiveness can take a vari-ety of forms. Tariffs on imports of goods from producers who do not operateunder emission regulations are perhaps the most straightforward, except thatascertaining carbon content is difficult. Border tax adjustments apply not justto import tariffs alone but to a combination of import tariffs and export subsi-dies. Broader phrases such as trade controls, import penalties, or carbonequalization measures include the option— likely to be adopted in practice—of requiring importers to buy emission permits, or “international reserveallowances.” For economists such importer permit requirements are preciselyequivalent to import tariffs— the cost of the permit is the same as the tariff rate.Others would not so readily make this connection, however. International lawmay well defy economic logic by treating import tariffs as impermissible butpermit requirements for imports as acceptable.5 Trade sanctions go beyond tradecontrols: while the latter fall only on environmentally relevant sectors, the for-mer target products that are arbitrary and unrelated to the non compliant act, inan effort to induce compliance.6

Jeffrey A. Frankel 71

2. Intergovernmental Panel on Climate Change (2001, chap. 8.3.2.3, pp. 536-44). In chapter 2of this volume, Bordoff reports studies’ estimates in the range of 8 to 11 percent, including an esti-mate from McKibbin and others (1999) that leakage if the United States adopted its Kyoto Protocoltarget unilaterally would have been 10 percent. Ho, Morgenstern, and Shih (2008) also find that theimposition of a price on carbon in the United States would produce substantial leakage for someindustries, especially in the short run; they conclude that petrochemicals and cement are the mostadversely impacted, followed by iron and steel, aluminum, and lime products. Demailly and Quirion(2008a) and Reinaud (2008) do not find large leakage effects from the first stage of the EU Emis-sions Trading System; but this tells us little about the next, much more serious, stage. I cannot helpfeeling that all these studies may underestimate some long-run general equilibrium effects.

3. It is not meaningful to talk about an adverse effect on the competitiveness of the Americaneconomy in the aggregate. Those sectors low in carbon intensity would in theory benefit from anincrease in taxation of carbon relative to everything else. This theoretical point is admittedly notvery intuitive. Far more likely to resonate publicly is the example that producers of renewableenergy, and of the equipment that they use, would benefit from higher fossil fuel prices.

4. Houser and others (2008).5. Pauwelyn (2007) and Fischer and Fox (2009).6. They are used multilaterally only by the WTO and United Nations Security Council, and are

not currently under consideration as a mechanism for addressing climate change (Charnovitz

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The Possible Application of Trade Barriers by the United States

Of the twelve market- based climate change bills introduced in the 110thCongress, almost half called for some sort of border adjustments. Some wouldhave featured a tax to be applied to fossil fuel imports. (This might be unob-jectionable, provided the same tax is applied to the domestic production of thesame fossil fuels; but otherwise it would be distortionary and illegal vis- à- visthe World Trade Organization.) Others would have required that energy- intensive imports surrender permits corresponding to the carbon emissionsembodied in them.7 The Bingaman- Specter Low Carbon Economy Act of 2007would have provided that “if other countries are deemed to be making inade-quate efforts [in reducing global GHG emissions], starting in 2020 the presidentcould require importers from such countries to submit special emissionallowances (from a separate reserve pool) to cover the carbon content of cer-tain products.” Similarly, the 2007 Lieberman- Warner Bill would have requiredthe president to determine what countries have taken comparable action to limitGHG emissions; for imports of covered goods from covered countries, theimporter would then have had to buy international reserve allowances.8 In the2007 bill, the requirement would have gone into effect in 2020. These require-ments are equivalent to a tax on the covered imports. The two major presidentialcandidates in the 2008 U.S. election campaign supported some version of thesebills, including import penalties in the name of safeguarding competitiveness vis- à- vis developing countries.

In addition, a different law that has already been passed and gone into effectposes similar issues: The Energy Independence and Security Act of 2007 “lim-its U.S. government procurement of alternative fuel to those from which thelifecycle greenhouse gas emissions are equal to or less than those from con-ventional fuel from conventional petroleum sources.”9 Canada’s oil sands arevulnerable. Because Canada has ratified the Kyoto Protocol and the UnitedStates has not, the legality of this measure seems questionable, in the inexpertjudgment of the author.


2003b, page 156). Pauwelyn (2008) compares some of these various options more carefully, froma legal standpoint. Fischer and Fox (2009) compare four of them from an economic standpoint:import tax alone, export rebate alone, full border adjustment, and domestic production rebate. Huf-bauer, Charnovitz, and Kim (2009, chapter 3) are more exhaustive still.

7. Hufbauer, Charnovitz and Kim (2009, table 1.A.2).8. The Lieberman-Warner Bill, S 2191: Americas Climate Security Act of 2007, sections

6005–6.9. Energy Independence and Security Act of 2007, section 526; cited in Financial Times, March

10, 2008. Pauwelyn (2008) deals with government procurement and Kyoto.

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The Possible Application of Trade Barriers by the EU

It is possible that many in Washington do not realize that the United Statesis likely to be the victim of legal sanctions before it is the wielder of them. InEurope, firms have already entered the first Kyoto budget period of bindingemission limits, competitiveness concerns are well advanced, and the nonpar-ticipating United States is an obvious target of resentment.10

After the United States failed to ratify Kyoto, European parliamentarians in2005, and French prime minister Dominique de Villepin in 2006, proposed a“Kyoto carbon tax” or “green tax” against imports from the United States.11

The European Commission had to make a decision on the issue in January 2008,when the European Union determined its emission targets for the post- Kyotoperiod. In preparation for this decision, French president Nicolas Sarkozywarned:

If large economies of the world do not engage in binding commitments to reduce emis-sions, European industry will have incentives to relocate to such countries. . . . Theintroduction of a parallel mechanism for border compensation against imports fromcountries that refuse to commit to binding reductions therefore appears essential, whetherin the form of a tax adjustment or an obligation to buy permits by importers. This mech-anism is in any case necessary in order to induce those countries to agree on such acommitment.12

The mechanism envisioned here sounds similar to that in the Bingaman- Specterand Lieberman- Warner bills, with the difference that it could go into effect soon,because Europe is already limiting emissions whereas the United States is not.In the event, the EU Commission instead included this provision in its directive:

Energy- intensive industries which are determined to be exposed to significant risk ofcarbon leakage could receive a higher amount of free allocation or an effective carbonequalization system could be introduced with a view to putting EU and non- EU pro-ducers on a comparable footing. Such a system could apply to importers of goodsrequirements similar to those applicable to installations within the EU, by requiring thesurrender of allowances.13


10. Bierman and Brohm (2005); Bhagwati and Mavroidis (2007); National Board of Trade,Government of Sweden (2004). Recent papers that compare the various options for border meas-ures in a European context include Alexeeva-Talebi, Loschel and Mennel (2008), Demailly andQuiron (2009), and Reinaud (2008).

11. Beattie (2008); “Mandelson Rejects CO2 Border Tax,” EurActiv.com, December 18, 2006.12. Letter to EU Commission president José Manuel Barroso, January 2008.13. The source for this is paragraph 13 of the “Directive of the European Parliament and of the

Council Amending Directive 2003/87/EC so as to Improve and Extend the EU Greenhouse GasEmissions Allowance Trading System,” January 2008.

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The second of the two options, “carbon equalization,” sounds consistent withwhat is appropriate— and with the sort of measures suggested by Sarkozy andspelled out in detail in the U.S. bills. The first option is poorly designed, however.

Free allocation of permits would help European industries that are carbonintensive and therefore vulnerable to competition from nonmembers by givingthem a larger quantity of free GHG emission permits. According to simplemicroeconomic theory, this would do nothing to address leakage. Because carbon- intensive production is cheaper in nonparticipating countries, the Euro-pean firms in theory would simply sell the permits they receive and pocket themoney, with the carbon- intensive production still moving from Europe to thenonparticipants. Admittedly, in practice there might be some effects; for exam-ple, an infusion of liquidity might keep in operation a firm that otherwise wouldgo bankrupt. But overall, there would probably be almost as much leakage asif there had been no policy response at all.14 Presumably, the purpose behindthis option is not to minimize leakage, for which it would be the wrong remedy,nor even to punish nonparticipating countries, but simply to buy off domesticinterests so that they will not oppose action on climate change politically.

Would Trade Controls or Sanctions Be Compatible with the WTO?

Would measures that are directed against carbon dioxide emissions in othercountries, as embodied in electricity or in goods produced with it, be accept-able under international law? Not many years ago, most international expertswould have said that import barriers against carbon- intensive goods, whethertariffs or quantitative restrictions, would necessarily violate international agree-ments. Under the General Agreement on Tariffs and Trade (GATT), althoughcountries could use import barriers to protect themselves against environmen-tal damage that would otherwise occur within their own borders, they couldnot use import barriers in efforts to affect how goods are produced in foreigncountries, so- called process and production methods (PPMs). A notoriousexample was the GATT ruling against U.S. barriers to imports of tuna from dolphin- unfriendly Mexican fishermen. But things have changed.

The World Trade Organization (WTO) came into existence, succeeding theGATT, at roughly the same time as the Kyoto Protocol. The drafters of eachtreaty showed more consideration for the other than do the rank and file amongenvironmentalists and free traders, respectively. The WTO regime is morerespectful of the environment than was its predecessor. Article XX allows


14. Of course, free allocation of permits would be an equally bad way of protecting exposedindustries in the United States. See the discussion by Bordoff in chapter 2 in this volume.

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exceptions to Articles I and III for purposes of health and conservation. ThePreamble to the 1995 Marrakech Agreement establishing the WTO seeks “toprotect and preserve the environment;” and the 2001 Doha Communiqué thatsought to start a new round of negotiations declares: “The aims of . . . open and nondiscriminatory trading system, and acting for the protection of the envi-ronment . . . must be mutually supportive.” The Kyoto Protocol text is equallysolicitous of the trade regime. It says that the parties should “strive to imple-ment policies and measures . . . to minimize adverse effects . . . on internationaltrade.” The United Nations Framework Convention on Climate Change fea-tures similar language.

GHG emissions are PPMs. Is this an obstacle to the application measuresagainst them at the border? I do not see why it has to be. Three precedents canbe cited: sea turtles in the Indian Ocean, ozone in the stratosphere, and tires inBrazil.

The true import of a 1998 WTO panel decision on the shrimp- turtle casewas missed by almost everyone. The big significance was a pathbreaking rul-ing that environmental measures can target not only exported products (ArticleXX) but also partners’ PPMs— subject, as always, to nondiscrimination (Arti-cles I and III). The United States was in the end able to seek to protect turtlesin the Indian Ocean, provided it did so without discrimination against Asianfishermen. Environmentalists failed to notice or consolidate the PPM prece-dent, and to the contrary were misguidedly up in arms over this case.15

Another important precedent was the Montreal Protocol on stratosphericozone depletion, which contained trade controls. The controls had two moti-vations.16 The first was to encourage countries to join. And the second, if majorcountries had remained outside, was to minimize leakage, the migration of theproduction of banned substances to nonparticipating countries. In the event,the first worked, so the second was not needed.

In case there is any doubt that Article XX, which uses the phrase “health andconservation,” also applies to global environmental concerns such as climatechange, a third precedent is relevant. In 2007, a new WTO Appellate Body deci-sion regarding Brazilian restrictions on imports of retreaded tires confirmed theapplicability of Article XX(b): Rulings “accord considerable flexibility to WTOMember governments when they take trade- restrictive measures to protect lifeor health . . . [and] apply equally to issues related to trade and environmentalprotection, . . . including measures taken to combat global warming.”17


15. For a full explanation of the legal issues, see Charnovitz (2003a). Also see Bhagwati andMavroidis (2007), Charnovitz and Weinstein (2001), Deal (2008), and Weinstein (2001).

16. Brack (1996).17. From a personal communication with Brendan McGivern, December 12, 2007.

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These three examples go a long way toward establishing the legitimacy oftrade measures against PPMs. Many trade experts, both economists and inter-national lawyers, are not yet convinced18—let alone representatives of Indiaand other developing countries. I personally have come to believe that theKyoto Protocol could have followed the Montreal Protocol by incorporating well- designed trade controls aimed at nonparticipants. One aspect that strength-ens the applicability of the precedent is that we are not talking about targetingpractices in other countries that harm solely the local environment, where thecountry can make the case that this is nobody else’s business. The depletion ofthe stratospheric ozone and the endangerment of sea turtles are global exter-nalities. (It helped that these are turtles that migrate globally.) So is climatechange from GHG emissions. A ton of carbon emitted into the atmosphere hurtsall residents of the planet.

Principles for Designing Legitimate Penalties on Carbon- Intensive Imports

Although the shrimp- turtle case and the Montreal Protocol help establishthe principle that well- designed trade measures can legitimately target PPMs,at the same time they suggest principles that should help guide drafters as towhat is good design. First, the existence of a multilaterally negotiated interna-tional treaty such as the Kyoto Protocol conditions the legitimacy of tradecontrols. On the one hand, that leakage to nonmembers could negate the goalof the protocol strengthens the case for (the right sort of) trade measures. It isstronger, for example, than in the shrimp- turtle case, which was largely a uni-lateral U.S. measure.19 On the other hand, the case for trade measures is weakerthan it was for the Montreal Protocol. (Multilateral initiatives like the latter areon firmer ground than unilateral initiatives.) The Kyoto Protocol could havemade explicit allowance for multilateral trade controls, and chose not to. Thecase would be especially weak for American measures if the United States hasstill not ratified the protocol or a successor agreement. The Europeans have arelatively good case against the United States, until such time as the UnitedStates ratifies. But the case would be stronger still if a future multilateral agreement— for example, under the United Nations Framework Convention on


18. Some experts believe that even multilateral trade penalties against nonmembers might notbe permissible under the WTO. See Sampson (2000, 87).

19. Webster (2008) explains that unilateral measures more likely acceptable if in pursuit of anexisting multilateral agreement such as the Kyoto Protocol. Even sea turtles are, however, givensome protective status by their inclusion in Appendix 1 of the Convention on International Tradein Endangered Species of Wild Fauna and Flora.

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Climate Change (UNFCCC)—agreed on the legitimacy of trade measures andon guidelines for their design.

Second, there is the question of the sorts of goods or services to be madesubject to penalty. It would certainly be legitimate to apply tariffs against coalitself, assuming that the domestic taxation of coal or a domestic system of trad-able permits was in place. It is probably also legitimate when applied to thecarbon content of electricity, though this requires acceptance of the PPM prin-ciple. The big question is the carbon/energy content of manufactures. Tradesanctions would probably not be legitimate when applied solely as punishmentfor free riding, against unrelated products of a nonmember, or, in a more extremecase, on clean inputs— for example, a ban on U.S. turbines used for low- carbonprojects (unless perhaps economy- wide sanctions were multilaterally agreedby UNFCCC members).20

Paradoxically, the need to keep out coal- generated electricity or aluminumfrom nonmembers of the Kyoto Protocol is greater than the need to keep outcoal itself. The reason is that the Protocol already puts limits on within- countryemissions. Assuming the limits are enforced, then the world community hasno particular interest in how the country goes about cutting its emissions. Butif the country imports coal- generated electricity or aluminum from nonmem-bers, the emissions occur outside its borders and the environmental objectiveis undermined.

It is hard to determine carbon content of manufactures. In practice, the bestwould be to stay with the halfdozen biggest- scale, most- energy- intensive industries— probably aluminum, cement, steel, paper, glass, perhaps iron andchemicals. Even here there are difficult questions. What if the energy used tosmelt aluminum in another country is cleaner than in the importing country(Iceland’s energy comes from hydropower and geothermal power) or dirtier(much of Australia’s energy comes from coal)? How can one distinguish themarginal carbon content of the energy used for a particular aluminum ship-ment from the average carbon content of energy in the country of origin? Theseare questions that will have to be answered. But as soon as one goes beyondsix or seven big industries, it becomes too difficult for even a goodfaith inves-tigator to discern the effective carbon content, and the process is also too liableto abuse. One would not want to levy tariffs against the car parts that are madewith the metal that was produced in a carbon- intensive way, or against the auto-


20. Charnovitz (2003b, 156) emphasizes the distinction between trade controls, which fall onenvironmentally relevant sectors, versus trade sanctions, where the targeted products are arbitraryand unrelated to the noncompliant act (and are used multilaterally only by the WTO and UN Secu-rity Council).

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mobiles that used those car parts (they could be high- mileage hybrids!), oragainst the products of the firms that bought the cars, and so on.21

The Big Danger

Just because a government measure is given an environmental label doesnot necessarily mean that it is motivated primarily— or even at all— by bonafide environmental objectives. To see the point, one has only to look at the mas-sive mistake of American subsidies of ethanol made from corn (and protectionagainst competing sugar imports from Brazil). If each country on its ownimposes border penalties on imports in whatever way suits national politics,they will be poorly targeted, discriminatory, and often disguisedly protection-ist. When reading the language in the U.S. congressional bills or the EU decision,it is not hard to imagine that special interests could take over for protectionistpurposes the process whereby each government decides whether other coun-tries are doing their share or what foreign competitors merit penalties.22 Thusthe competitiveness provisions will indeed run afoul of the WTO, and they willdeserve to.

It is important who makes the determinations regarding what countries areabiding by carbon- reduction commitments, what entity can retaliate againstthe noncompliers, what sectors are fair game, what sort of barriers are appro-priate, and when a target country has moved into compliance so that it is timeto remove the penalty. One policy conclusion is that these decisions should bedelegated to independent panels of experts rather than made by politicians.

The most important policy conclusion is that we need a multilateral regimeto guide such measures. Ideally, such a regime would be negotiated along witha successor to the Kyoto Protocol that set targets for future periods and broughtthe United States and developing countries inside. But if that negotiation processtakes too long, it might be useful in the shorter run for the United States to enternegotiations with the European Union to harmonize guidelines for border penal-ties, ideally in informal association with the secretariats of the UNFCCC andthe WTO.23


21. The 2008 revision of the McCain-Lieberman Bill broadened “covered products” to includegoods that generate emissions more indirectly (see chapter 2 in this volume).

22. The congressional language imposing penalties on imports from countries that do not taxcarbon was apparently influenced by the International Brotherhood of Electrical Workers, whichregularly lobbies for protection of American workers from foreign competition; see Beattie (2008).Simultaneously, the European Trade Union Confederation urged the EU Commission to tax importsfrom countries refusing to reduce emissions. See Wall Street Journal (2008).

23. Sampson (1999).

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Why Take Multilateralism Seriously?

“Why should WTO obligations be taken seriously?” some may ask. Thereare three possible answers, based on considerations of international citizen-ship, good policy, and realpolitik.

First, with regard to international citizenship, one question is whether theUnited States wants to continue the drift of the recent past in the general direc-tion of international rogue country status or rather return to the highly successfulpostwar strategy of adherence to international law and full membership in— indeed, leadership of— multilateral institutions. The latter course does not meanroutinely subordinating U.S. law, let alone American interests, to internationallaw. There will be cases where the United States wants to go its own way. Butthe effort on climate change should surely not be one of these cases. Amongother reasons is the fact that GHG emissions are inherently a global external-ity. No single country can address the problem on its own, due to the free riderproblem. Although there is a role for unilateral actions on climate change— forexample, by the United States, as part of a short- term effort to demonstrateseriousness of purpose and begin to catch up with the record of the Europeans— in the long term, multilateral action offers the only hope of addressing theproblem. The multilateral institutions are already in place— specifically, theUNFCCC; its child, the Kyoto Protocol; and the WTO— and they were pre-dominantly created under U.S. leadership.

Second, the basic designs and operations of these institutions happen to berelatively sensible, taking political realities as given. They are more sensiblethan most critics of the international institutions and their alleged violations ofnational sovereignty believe. This applies whether the critics are on the left orright, and whether their main concern is the environment or the economy.24 Onecan place very heavy weight on economic goals and yet realize the desirabilityof addressing externalities, minimizing leakage, dealing with competitivenessconcerns, and so forth. One can place very heavy weight on environmental goalsand yet realize the virtues of market mechanisms, nondiscrimination, reciproc-ity, addressing international externalities cooperatively, preventing specialinterests from hijacking environmental language for their own financial gain,and so forth.

The third reason why the United States should be prepared to modify thesort of “international reserve allowances” language of the Lieberman- WarnerBill, and to move in the direction of multilateral coordination of guidelines for


24. I have addressed elsewhere other ways in which the climate regime (Kyoto) could comeinto conflict with the trade regime (WTO), and the more general questions of whether free tradeand environmental protection need be in conflict—Frankel (2004, 2005a, 2005c).

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such measures, comes from hardheaded self-interest: a desire to avoid beingthe victim of emulation or retaliation. Section 6006 of Lieberman- Warner didnot envision these measures going into effect until 2020.25 This is as it shouldbe, because any such bill must give the United States time to start playing thegame before it can presume to punish other players for infractions. But the EUlanguage could be translated into penalties against U.S. products any day. TheEU members are far from the only governments that could claim to have takenstronger climate change policies than the United States.26 It is in the Americaninterest to have any border penalties governed by a sensible system of multi-lateral guidelines. The European Union might welcome U.S. participation injoint negotiations to agree on guidelines, as part of a process of negotiationsover the Kyoto successor regime.

The argument is stronger than the historical examples of U.S. import barri-ers leading to subsequent emulation and retaliation that come back to hitAmerican exports (the Smoot Hawley tariff in 1930, antidumping cases in the1980s, . . .). Here the United States has an opportunity to influence others’ bar-riers against its goods ten years before it would be putting up barriers againsttheirs.

Concluding Recommendations

Both the economics and the law are complicated. The issues need furtherstudy. Nevertheless, this chapter offers a central message: Border measures toaddress leakage need not necessarily violate WTO law or sensible trade prin-ciples, but there is a very great danger in practice that they will.

I conclude with several subjective judgments as to principles that could guidea country’s border measures if its goal were indeed to reduce leakage and toavoid artificially tilting the playing field toward carbon- intensive imports fromnonparticipating countries or damaging the world trading system, especially ifit is viewed as politically necessary to do something to address competitive-ness concerns. I classify characteristics of possible border measures into threecategories, which I will name by color (for lack of better labels):

—The “white” category: those that seem to me reasonable and appropriate.27


25. The Boxer-Lieberman-Warner substitute version (S 3036), voted on in June 2008, movedthe starting date for border adjustments forward to 2014.

26. Even China has apparently enacted efficiency standards on automobiles, refrigerators, andair conditioners that exceed regulations in the United States. How will Americans react if Chinaputs justified penalties on imports from the United States?

27. Hufbauer, Charnovitz, and Kim (2009, chapter 5) call this category “the green space” andpresent a list of desirable attributes which is more authoritative than the one I had drawn up, at

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—The “black” category: those that seem to me very dangerous, in that theyare likely to become an excuse for protectionism.

—The “gray” category: those that fall in between.The white (appropriate) border measures could be either tariffs or (equiva-

lently) a requirement for importers to surrender tradable permits. Theseprinciples include:

—Measures should follow some multilaterally agreed- to set of guidelinesamong countries participating in the emission targets of the Kyoto Protocoland/or its successors.

—Judgments as to findings of fact— which countries are complying or not,which industries are involved and what is their carbon content, which coun-tries are entitled to respond with border measures, and the nature of the response— should be made by independent panels of experts.

—Measures should be applied only by countries that are reducing theiremissions in line with the Kyoto Protocol and/or its successors, against coun-tries that are not, either due to refusal to join or failure to comply.

—Border tax adjustments should target only imported fossil fuels, and a halfdozen of the most energy- intensive major import- competing industries: alu-minum, cement, steel, paper, and glass, and perhaps iron and chemicals.

The black (inappropriate) border measures include:—Unilateral measures applied by countries that are not participating in the

Kyoto Protocol or its successors.—Calculations of carbon content of imports by formulas that presume firms

necessarily use the same production processes as domestic competitors.28

—Judgments as to findings of fact that are made by politicians, who are vul-nerable to political pressure from interest groups for special protection.

—Unilateral measures that seek to sanction an entire country, rather thantargeting narrowly defined energy- intensive sectors.

—Import barriers against products that are further removed from the carbon- intensive activity, such as firms that use inputs that are produced in an energy- intensive process.


least from a legal standpoint. Green is the more familiar color, but I had thought to avoid it becauseof possible confusion with the “green box” of the WTO’s Agreement on Agriculture.

28. In the Venezuelan reformulated gasoline case, the WTO panel ruled that the United Statesshould have allowed for differences in foreign firms’ production processes. Venezuela successfullyclaimed that U.S. law violated national treatment—that is, discriminated in favor of domestic pro-ducers with regard to whether refineries were allowed to use individual composition baselines whenmeasuring pollution reduction. Pauwelyn (2007) proposes that if the foreign producer does notvoluntarily provide the information needed to calculate carbon content, then as a back-up the U.S.Customs Bureau assign imports an implicit carbon content based on the production techniquesthat are dominant in the United States.

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— Subsidies— whether in the form of money or extra permit allocations— to domestic sectors that are considered to have been put at a competitivedisadvantage.

The gray (intermediate) measures include:—Unilateral measures that are applied in the interim before there has been

time for multilateral negotiation over a set of guidelines for border measures.—The import penalties might follow the form of existing legislation on coun-

tervailing duties.


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Comment

Comment by Joseph E. Aldy

In chapter 3 of this volume, Jeffrey Frankel thoughtfully addresses the ques-tion of how to design effective policies to mitigate the adverse competitivenesseffects that result from domestic climate change policy. In evaluating meas-ures to address the climate- competitiveness issue, three categories of questionsmerit consideration. First, how serious are the competitiveness effects? Do theyjustify policy intervention? Second, are the policy responses to competitive-ness effects that are being considered adequate to remedy these effects? Dothey effectively level the playing field? Third, what are the implications of suchpolicy responses to competitiveness effects for international negotiations? Dothey promote broader participation or risk a trade war?

Before addressing these questions, let us be clear by what is meant by the“competitiveness effects of climate change policy.” Aldy and Pizer define suchcompetitiveness effects as the “adverse business impacts related to a domesticGHG regulation and the absence of regulation on international competitors.”1

In economic terms, such competitiveness effects reflect either the relocation offirms and manufacturing facilities to countries without domestic climate changepolicy or the allocation of investment in new facilities away from countrieswith climate policies to those countries without such policies. In environmen-tal terms, this reflects a reduction in environmental benefits as greenhouse gas(GHG) emissions increase in countries without climate policies, partially off-setting the emission abatement in countries with climate change policies. Somehave described this as “America’s China problem”—if the United States movesforward with domestic climate change policy while China does not. Of course,this is not a uniquely American phenomenon. The French refer to this as theirAmerican problem (as alluded to by Frankel), because France and the Euro-pean Union have moved forward with the EU’s Emission Trading Scheme

1. Aldy and Pizer (2008, 24).

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(ETS) and other efforts under the Kyoto Protocol, an agreement from whichthe United States walked away.

How serious are these competitiveness effects? Frankel refers to the Inter-governmental Panel on Climate Change’s assessment of the literature, whichshows GHG emission leakage could be on the order of 5 to 20 percent.2 In theaggregate, competitiveness effects may not be that serious. Approximately 70percent of U.S. carbon dioxide emissions occur in nontradable sectors, such astransportation and residential and commercial buildings.3 It seems unlikely thatimposing a price on carbon would cause a migration of Americans to devel-oping countries. The likely sources of near- term, low- cost emission abatementalso occur primarily in nontradable sectors. Only about 15 percent of the esti-mated emission abatement in 2015 would likely occur outside of the nontradabletransportation and buildings sectors.4 Even within the manufacturing sector,firm relocation in response to environmental regulatory costs will be less likelyfor those producing goods with high transport costs or that have a large phys-ical structure share of their capital.5

The climate- competitiveness effects could accrue primarily to the most- energy- intensive firms facing international competition. We have recentlyinvestigated this issue by simulating the effects of a unilateral carbon pricingpolicy on the manufacturing sector in 2015.6 We undertook an econometric analy-sis of the historic relationship between energy prices and various measures ofcompetitiveness, such as employment, production, and consumption (definedas production plus net imports) for the more than four hundred manufacturingindustries in the United States. The analysis is careful in controlling for a vari-ety of factors that could affect industrial competitiveness, and explicitly accountsfor the energy intensity of each industry’s manufacturing in estimating the energy price- competitiveness relationship. Using these estimated relationships, we sim-ulated the effects of a $15 per ton carbon dioxide (CO2) price.

Table 3C-1 presents the summary results for our analyses, aggregated to sev-eral of the most- well- known, energy- intensive industry groups. A $15 per tonCO2 price would increase the price of electricity in the manufacturing sectorabout 8 percent in 2015.7 We estimate that overall manufacturing employment


2. As Frankel appropriately notes, this could reflect firm/facility relocation (competitivenesseffects) as well as the effects of declining prices in world energy markets as developed countriespursue mitigation policies. Developing countries could respond to these lower energy prices andincrease their emissions above what they would have been otherwise.

3. U.S. Energy Information Administration (2007).4. U.S. Energy Information Administration (2006). This estimate also reflects the emission

abatement in the utility sector, but attributed by share of consumption to end- use sectors.5. Ederington, Minier, and Levinson (2005).6. Aldy and Pizer (2009).7. U.S. Energy Information Administration (2008).

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would decline on average about 0.2 percent, although it is important to notethat the 80 percent most- energy- efficient industries do not experience a changethat we would statistically discern from zero. The more energy- intensive indus-tries, however, experience larger declines in employment up to 2.3 percent inbulk glass. The effects on production are more pronounced than they are foremployment, but they follow similar trends between total manufacturing aver-age effects and energy- intensive manufacturing, as well as among those energy- intensive industries.

Although production in the most- energy- intensive industries declinesbetween about 1.6 to 3.4 percent under a $15 per ton CO2 price, competitionthrough international trade appears to constitute a modest fraction of this impact.Domestic consumption of goods produced in the energy- intensive industriesalso declines with this carbon price, on the order of 0.9 to 2.7 percent. Ouranalysis shows that consumers of goods produced in energy- intensive indus-tries would not switch to imports under a domestic climate policy; they wouldreduce their consumption of those goods. The net effect of international com-petition, represented by the rightmost column in the table, is about 0.6 to 0.9percentage points of the 1.6 to 3.4 percentage decline in production. It is notso much “us versus them” as it is “us versus us.” In effect, the consumers of energy- intensive goods respond to the higher cost (because of the carbon price)by becoming more efficient in how they use these goods, and they substituteto less energy- intensive alternatives, not by importing the same goods fromforeign firms.

This analysis suggests that the competitiveness effect of climate policy couldbe relatively modest, even on the most- energy- intensive industries. Despite thefact that this analysis raises questions about the need for policy responses to climate- competitiveness pressures, the debate about the nature of such policy


Table 3C-1. Predicted Effects of a $15 per Ton Carbon Dioxide Price on Various Manufacturing Sectors

Percent

Industry Employment Production Consumption Competitiveness

Industrial chemicals –1.5 –2.7 –1.8 –0.9Paper –2.1 –3.3 –2.4 –0.9Iron and steel –1.6 –2.7 –1.9 –0.8Aluminum –1.0 –2.0 –1.4 –0.7Cement –0.4 –1.6 –0.9 –0.7Bulk glass –2.3 –3.4 –2.7 –0.6Manufacturing average –0.2 –1.3 –0.6 –0.7

Source: Aldy and Pizer (2009).Note: Consumption is defined as domestic production plus net imports. The competitiveness effect is defined as the difference between

production and consumption effects.

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responses is likely to continue. For such policy responses to adequately elim-inate competitiveness effects, they must eliminate the CO2 price wedge betweenU.S. firms and their foreign competitors. This price wedge effectively drivesthe relocation of economic activity from higher carbon price regions to zero-or lowcarbon price regions. Several proposals to address competitiveness con-cerns have been tabled in the U.S. policy debate, but none adequately eliminatesthe carbon price wedge.

The Lieberman- Warner Bill includes a variant of the proposal from the Inter-national Brotherhood of Electrical Workers and American Electric Power thatwould require GHG emission allowances to cover the embedded carbon of bulkcommodity imports if they originate in countries found to have domestic cli-mate change policies deemed to be insufficiently comparable to the U.S. cap- and- trade program.8 Firms importing these goods could buy emissionallowances from the U.S. government, or possibly from certain recognized cap- and- trade programs (for example, the ETS) or emissions reduction creditprograms (for example, the Kyoto Protocol’s Clean Development Mechanism).The U.S. government would supply emission allowances from a separate fundthan the allowances constituting the U.S. economy- wide cap under the bill, butthe import emission allowances would be priced at the same level as the market- clearing price in the U.S. emission trading market. In effect, this is a border taxby another name. If these imports had to hold allowances to cover every ton ofembedded carbon, then this would close the competitiveness wedge. The pro-posal, however, recognizes that if energy- intensive firms in the United Statesreceive at least a partially gratis allocation (which they do under Lieberman- Warner and other bills), then so should importers in order to satisfy World TradeOrganization rules. For example, suppose that U.S. firms receive 20 percent ofthe program’s allowances for free and consider an importer trying to bring ina rolled steel shipment with 1,000 tons of embedded carbon. The importer onlyneeds to buy allowances to cover 800 tons of carbon, not the full 1,000 tons,because of the need to treat foreign and domestic firms equally under the WorldTrade Organization. The effective carbon price on this shipment then is only80 percent of the price domestic firms face. If the importer decides to buyallowances from the EU’s ETS or the Clean Development Mechanism, whichit would only do if those prices were lower than the going price in the U.S.market, then, again, the importer would face a lower price than what domesticfirms face.


8. This discussion will focus on the proposal presented in the 2008 Manager’s Amendment tothe Lieberman- Warner Bill (S 3036), not the 2007 Lieberman- Warner Bill version (S 2191) or the Bingaman- Specter Bill (S 1766) version of this proposal.

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The prospect of a gratis allowance allocation to compensate energy- intensivefirms has also received some traction in the policy debate. Free allowances tofirms will not affect the carbon price wedge. As the EU’s ETS showed, evenwith a free allowance allocation, energy prices increase with the emission trad-ing market allowance price. The carbon price embedded in goods is effectivelythe same regardless of whether allowances are given away or auctioned.9 Thefree allocation will affect the profits of the recipient firms; a free allowanceallocation is simply a transfer of an asset from the government to the privatesector. Thus, freely giving away an asset will affect firms’ market entry andexit decisions. This may be sufficient, from a political economy perspective,to secure the support of energy- intensive firms, but it is insufficient to elimi-nate the competitiveness effects.10

The steel industry has advocated for performance standards on imports.11

To bring imports into the U.S. economy, foreign firms would have to meet a carbon- intensity standard for the production of that class of goods. Such anapproach returns environmental policy to the early 1970s, when cost- effectiveness played virtually no role in policy design. It risks increasingsubstantially the costs to users of energy- intensive imports, and it would increasethe total costs for a given amount of GHG emission abatement. Finally, it isquite unlikely that such a standards approach would eliminate the competi-tiveness price wedge because it works through a mechanism unrelated to carbonprices. In all three cases, the measures intended to address competitiveness donot effectively level the playing field.

Designing such competitiveness policy measures in a domestic climatechange policy regime will have implications for international negotiations.Some countries may react quite negatively to unilateral U.S. action on this front.For example, the European Union could simply adopt the same competitive-ness policy the United States has designed to address its concern with developingcountries but apply it to America during the Kyoto Protocol commitment periodof 2008–12 (see chapter 3 for an elaboration of this point). The Lieberman- Warner Bill debated in June 2008 gave developing countries all of two yearsafter the start of the U.S. cap- and- trade program to develop comparable domes-tic policies before the import GHG emission allowance requirement wouldbecome operative. Because the United States failed to ratify the Kyoto Proto-col and has stayed on the sidelines in terms of mandatory domestic emissionmitigation efforts, some countries could consider such an approach as con-


9. See Aldy and Pizer (2008) for more discussion of this issue, and the minor exceptions to thisrule.

10. Frankel takes a strong exception to such subsidies through free allowance allocations.11. Slater (2008).

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frontational from a (developed country) latecomer to the climate change mit-igation effort. Though some believe that this threat could bring large developingcountries to the negotiating table, others fear that it could cause China, India,and other large countries to walk away from the climate talks and consider traderetaliations that could descend into a trade war. Or perhaps China might sim-ply find clever ways to circumvent the burdens of the U.S. policy. Suppose SouthKorea implemented a domestic climate change policy deemed to be compara-ble to the U.S. effort. A ship in Shanghai could load up with Chinese steel, sailto Busan, and unload its Chinese steel. Then the ship could load up with Koreansteel and take it to the U.S. market. It may be unlikely to expect, however, thatChina would impose domestic regulatory burdens on its entire steel sector toprotect the small fraction that exports to the United States.

The risks posed to the international climate and international trade regimesby a unilateral approach to addressing climate- competitiveness concerns sug-gest the need for a more thoughtful, multilateral consideration of these issues.The Montreal Protocol, which has successfully resulted in the phasing out ofmany ozone- depleting substances, includes trade sanctions to enforce compli-ance. Though the strong record of compliance with the Montreal Protocol’sgoals has obviated the need to use the sanctions, this multilateral approach maybe a better avenue for addressing competitiveness under climate change pol-icy. Frankel’s recommendation for a multilateral approach under the UnitedNations Framework Convention on Climate Change is quite sound and meritsserious consideration by U.S. policymakers and negotiators around the world.


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Aldy, J. E., and W. A. Pizer. 2008. Issues in the Design of U.S. Climate Change Policy.RFF Discussion Paper 08-20. Washington: Resources for the Future.

Aldy, J.E., and W.A. Pizer. 2009. The Competitiveness Impacts of Climate Change Mit-igation Policies. Arlington, VA: Pew Center on Global Climate Change, May.

Aldy, Joseph, Scott Barrett, and Robert Stavins. 2003. “Thirteen Plus One: A Compari-son of Global Climate Architectures.” Climate Policy 3, no. 4: 373–97.

Alexeeva- Talebi, Victoria, Andreas Loschel, and Tim Mennel. 2008. “Climate Policy andthe Problem of Competitiveness: Border Tax Adjustments or Integrated Emissions Trad-ing?” Discussion Paper 08-061, Zentrum fur Europaische Wirtschaftsforschung GmbH,Mannheim, Germany.

Beattie, Alan. 2008. “Green Barricade: Trade Faces a New Test as Carbon Taxes GoGlobal.” Financial Times, January 24.

Bhagwati, Jagdish, and Petros C. Mavroidis. 2007. “Is Action Against U.S. Exports forFailure to Sign the Kyoto Protocol WTO Legal?” World Trade Review 6: 299–310.

Bierman, Frank, and Rainer Brohm. 2005. “Implementing the Kyoto Protocol withoutthe United States: The Strategic Role of Energy Tax Adjustments at the Border.” Cli-mate Policy 4, no. 3: 289–302 .

Brack, D. 1996. International Trade and the Montreal Protocol. London: Royal Instituteof International Affairs and Earthscan Publications.

Charnovitz, Steven. 2003a. “The Law of Environmental ‘PPMs’ in the WTO: Debunk-ing the Myth of Illegality.” Yale Journal of International Law 27, no. 1: 59–110.

———. 2003b. “Trade and Climate: Potential Conflicts and Synergies.” In Beyond Kyoto:Advancing the International Effort against Climate Change. Washington: Pew Cen-ter on Global Climate Change.

Charnovitz, Steven, and Michael Weinstein. 2001. “The Greening of the WTO.” ForeignAffairs 80, no. 6: 147–56.

Cosbey, Aaron, Sergio Saba, and Lucas Assuncao. 2003. “Options on Kyoto under WTORules.” In Implications, Including for Development, of the Interface between Envi-ronment and Trade Policies for Oil- Exporting Countries. New York: United Nations.

Deal, Timothy. 2008. WTO Rules and Procedures and Their Implication for the KyotoProtocol. New York: United States Council for International Business.

Demailly, D., and P. Quirion. 2008a. “European Emission Trading Schemes and Com-petitiveness: A Case Study on the Iron and Steel Industry.” Energy Economics 30:2009-2027.

———. 2009. “Leakage from Climate Polices and Border Tax Adjustment: Lessons froma Geographic Model of the Cement Industry.” In The Design of Climate Policy, ed. R.Guesnerie and H. Tulkens. MIT Press.

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Ederington, J., J. Minier, and A. Levinson. 2005. “Footloose and Pollution- Free.” Reviewof Economics and Statistics 87, no. 1: 92–99.

Fischer, Carolyn, and Alan Fox. 2009. “Comparing Policies to Combat Emissions Leak-age: Border Tax Adjustment versus Rebates.” RFF Discussion Paper 09-02.Washington: Resources for the Future.

Frankel, Jeffrey. 1998. “The Kyoto Agreement on Global Climate Change: The Admin-istration Economic Analysis, Remarks to the NBER Conference on Tax Policy andthe Economy,” Oct. 20 (http://ksghome.harvard.edu/~jfrankel/speechs&testimony.htm[May 2009]).

———. 2004. “Kyoto and Geneva: Linkage of the Climate Change Regime and the TradeRegime.” Paper presented at Broadening Climate Discussion: The Linkage of ClimateChange to Other Policy Areas, conference sponsored by Fondazione Eni Enrico Mat-tei and Massachusetts Institute of Technology, Venice, June.

———. 2005a. “Climate and Trade: Links between the Kyoto Protocol and WTO.” Envi-ronment 47, no. 7: 8–19.

———. 2005b. “The Environment and Globalization.” In Globalization: What’s New,ed. Michael Weinstein. Columbia University Press.

———. 2005c. “You’re Getting Warmer: The Most Feasible Path for Addressing GlobalClimate Change Does Run Through Kyoto.” In Trade and Environment: Theory andPolicy in the Context of EU Enlargement and Transition Economies, ed. John Maxwelland Rafael Reuveny. Cheltenham, U.K.: Edward Elgar.

———. 2007. “Formulas for Quantitative Emission Targets.” In Architectures for Agree-ment: Addressing Global Climate Change in the Post Kyoto World, ed. Joseph E. Aldyand Robert Stavins. Cambridge University Press.

Frankel, Jeffrey, and Andrew Rose. 2005. “Is Trade Good or Bad for the Environment?Sorting out the Causality.” Review of Economics and Statistics 87, no. 1: 85–91.

Ho, Mun, Richard Morgenstern, and Jhih- Shyang Shih. 2008. “Impact of Carbon PricePolicies on U.S. Industry.” RFF Discussion Paper 09-37. Washington: Resources forthe Future.

Houser, Trevor, Rob Bradley, Britt Childs, Jacob Werksman, and Robert Heilmayr. 2008.Leveling the Carbon Playing Field: International Competition and US Climate Pol-icy Design. Washington: Peterson Institute for International Economics.

Hufbauer, Gary, Steve Charnovitz, and Jisun Kim. 2009. Global Warming and the WorldTrading System. Washington: Peterson Institute for International Economics.

Intergovernmental Panel on Climate Change. 2001. Third Assessment Report: ClimateChange 2001, ed. Working Group III. Geneva.

McKibbin, W., M. Ross, R. Shackleton, and P. Wilcoxen. 1999. Emissions Trading, Cap-ital Flows and the Kyoto Protocol. Discussion Paper in International Economics 144.Brookings.

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Pauwelyn, Joost. 2007. “U.S. Federal Climate Policy and Competitiveness Concerns: TheLimits and Options of International Trade Law.” Nicholas Institute for Environmen-tal Policy Solutions Working Paper 0702. Duke University.


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Reinaud, Julia. 2008. “Issues Behind Competitiveness and Carbon Leakage – Focus onHeavy Industry.” IEA Information Paper. International Energy Agency: Paris.

Sampson, Gary. 1999. “WTO Rules and Climate Change: The Need for Policy Coher-ence.” In Global Climate Governance: A Report on the Inter- Linkages between theKyoto Protocol and Other Multilateral Regimes, ed. Bradnee Chambers. UnitedNations University.

———. 2000. Trade, Environment and the WTO: The Post- Seattle Agenda. Policy Essay27. Washington: Overseas Development Council..

Seidman, Laurence, and Kenneth Lewis. 2009. “Compensation and Contributions underan International Carbon Treaty.” Journal of Policy Modeling 31, no. 3: 341-350.

Slater, J. 2008. “Climate Change: Competitiveness Concerns and Prospects for Engag-ing Developing Countries.” Testimony before the Energy and Air Subcommittee,Energy, and Commerce Committee, U.S. House of Representatives, March 5.

U.S. Energy Information Administration. 2006. Energy Market Impacts of AlternativeGreenhouse Gas Intensity Reduction Goals. Report SR/OIAF/2006-01. U.S. Depart-ment of Energy.

———. 2007. Emissions of Greenhouse Gases in the United States 2006. ReportDOE/EIA-0573(2006). U.S. Department of Energy.

———. 2008. Energy Market and Economic Impacts of S. 2191, the Lieberman- WarnerClimate Security Act of 2007. Report DOE /EIA- SR/OIAF/2008-01. U.S. Departmentof Energy.

Wall Street Journal. 2008. “Unions Back Carbon Tax on Big Polluting Nations.” Janu-ary 16.

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Technology Transfers and Climate Change: International Flows, Barriers, and Frameworks

Discourse concerning international technology transfers to address climatechange issues is typically based on a paradigm that is focused on North-

South technology flows and financial flows, especially in the context of officialdevelopment assistance programs or offset projects under the Clean Develop-ment Mechanism of the Kyoto Protocol. This paradigm is useful for manyanalytic and negotiating agendas. However, it reflects an overly narrow con-ceptualization of the nature, sources, and methods of international technologytransfers. It thus neglects important issues that need to be addressed in orderto utilize more fully the potential of international technology transfers for cli-mate change mitigation and/or adaptation.

This chapter proposes a complementary paradigm, which emphasizes theimportance of trade and foreign direct investment as the principal mechanismsby which technology is transferred internationally. The paradigm reflects diver-sity in the geography of technology flows, a different focus on the types ofinternational economic flows that facilitate technology transfers, a different setof barriers to international technology flows, and different institutional frame-works that can facilitate or impede technology flows.1

The second section of this chapter presents these paradigms in a moredetailed and comparative discussion.2 The third section considers evidenceabout the geography of international technology flows, with an explicit recog-

93

T H O M A S L . B R E W E R 4

The author is indebted to the following for their comments on the paper at the conference:Brian Flannery, Kelly Sims Gallagher, Muthukumara Mani, and Jacob Werksman. Gerry T. Westalso made useful comments on the conference paper before it was revised. Several changes weremade to reflect these comments in revising the paper for publication here.

1. Barton (2007) has also noted a shift in paradigms of technology transfer more generally—from a paradigm focused on licensing and intellectual property rights to a paradigm focused onforeign direct investment.

2. A subsequent conference paper (Brewer 2008a) develops a third paradigm, based on inter-national public-private cooperation agreements. That research was prompted in part by the insightfulcomments of Jacob Werksman at the Brookings Institution conference. Further research on inter-national institutional issues is being conducted on international public-private partnerships.

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nition of developing countries as sources of such flows. The fourth section ana-lyzes evidence about the barriers to international technology flows. The fifthsection describes the international institutional frameworks affecting the flows.The sixth section discusses the implications of these paradigms and flows forinternational negotiations.

Paradigms of International Technology Transfer

The term “technology” continues to be used in common parlance to refermostly to tangible goods, for instance, computer hardware; but it is typicallyused in the academic literature to include more intangible elements of organi-zations’ activities as applied knowledge or know- how. Further, the term is usedto include managerial know- how, not only in the engineering of productionprocesses but also more generally in management processes.

Over time, the literature on international technology transfers has progressedfrom a relatively narrow definition of technology as “scientific and engineer-ing knowledge, . . . which . . . are principally the outcome of R&D [researchand development]. The transfer of this codified knowledge constituted tech-nology transfer” in the earlier narrow notion of technology.3 Current notionsof technology, however, include a second notion as well— technology as tacitknowledge that is embedded in firms’ procedures and personnel. Though thefirst conceptualization leads to an analytic focus on explicit knowledge con-cerning specific products and their associated production processes, the secondconceptualization leads to a focus on the capabilities and processes of firms,especially the tacit knowledge that is embedded in them. This encompassingnotion of technology that includes both its “soft” and “hard” manifestations isnow widespread in government policymaking and business strategy circles aswell as academic circles, and it is reflected in the Stern Report on the economicsof climate change.4

Relevant Technologies for Climate Change Mitigation or Adaptation

There are numerous lists of industries and products (both goods and ser vices)related to climate change.5 A well- known list was developed by Pacala and


3. Cantwell (2009, 420).4. Stern (2007, 567); also see Brewer (2008b) and Fischer, Egenhofer, and Alessi (2008).5. When identifying technologies in terms of standardized product or industry classification

schemes—such as the Harmonized System of the World Customs Union or the International Stan-dard Industrial Classification system or the UN Product Code—there are a variety of technicalissues, which can be important in negotiations. These and related issues have been raised recently,especially with regard to international technology transfer and thus trade issues; see Howse and

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Thomas L. Brewer 95

Table 4-1. Types of Greenhouse Gas Emission–Reducing Technologies

Reducing emissions from energy supply and infrastructureLow emission, fossil- based power and fuels

Zero- emission power, hydrogen, and other value- added products High- efficiency coal / solid feedstock High- efficiency gas fuel cell / hybrid power systems

HydrogenHydrogen production from nuclear fission and fusionIntegrated hydrogen energy systemsHydrogen productionHydrogen storage and distributionHydrogen useHydrogen infrastructure safety

Renewable energy fuelsWind energySolar photovoltaic powerSolar buildingsConcentrating solar powerBiochemical conversion of biomassThermochemical conversion of biomassBiomass residuesEnergy cropsPhotoconversionAdvanced hydropowerGeothermal energy

NuclearExisting plant research and development Next- generation fission energy systems Near- term nuclear power plant systemsAdvanced nuclear fuel cycle processesNuclear fusion

Energy infrastructure High- temperature superconductivity Transmission and distribution technologiesDistributed generation and combined heat and powerEnergy storageSensors, controls and communicationsPower electronics

Reducing emissions from energy useTransportation

Light vehicles— hybrids, electric, and fuel cell vehicles Alternative- fueled vehiclesIntelligent transportation systems infrastructureAviationTransit buses- urban duty- cycle

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Table 4-1. Types of Greenhouse Gas Emission–Reducing Technologies (continued)

BuildingsBuilding equipment, appliances, and lightingBuilding envelope (insulation, walls, roof)Intelligent building systemsUrban heat island technologies

IndustryEnergy conversion and utilizationResource recovery and utilizationIndustrial process efficiencyEnabling technologies for industrial processes

Enhancing capabilities to measure and monitor emissions Hierarchical measuring and monitoring systems

For energy efficiencyFor geologic carbon sequestrationFor terrestrial carbon sequestrationFor ocean carbon sequestrationFor other greenhouse gas

Reducing the climate effect of non–carbon dioxide greenhouse gas emissionsMethane emissions from energy and waste

Anaerobic and aerobic bioreactor landfillsConversion of landfill gas to alternative usesElectricity generation technologies for landfill gasAdvances in coal mine ventilation air systemsAdvances in coal mine methane recovery systemsMeasurement and monitoring technology for natural gas systems

Methane and nitrous oxide emissions from agricultureAdvanced agriculture systems for nitrous oxide emissions reductionMethane reduction options for manure managementAdvanced agriculture systems for enteric emissions reduction

Emissions of high globalwarming potential gasesSemiconductor industry; abatement technologiesSemiconductor industry: substitute for processes producing gases with high global-

warming potentialSemiconductor and magnesium: recovery and recycleAluminum industry: perfluorocarbon emissionsElectric power systems and magnesium: substitute for SFe

Supermarket refrigeration: hydrofluorocarbon emissions

Nitrous oxide emissions from combustion and industrial sourcesNitrous oxide abatement technologies from nitric acid productionNitrous oxide abatement technologies for transportation

Emissions of tropospheric ozone precursors and black carbonAbatement technologies for emissions for tropospheric ozone precursors and

black carbon

Source: UNFCCC (2002, 63).

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Socolow on the basis of the fifteen “wedges” that they identified as having thepotential to contribute a reduction of 1 gigaton of carbon dioxide equivalent peryear by 2054.6 The United Nations Framework Convention on Climate Change(UNFCCC) has compiled a lengthy list, as presented in table 4-1.7

These lists of mitigation technologies differ in their level of detail and hencetechnological specificity, and they also differ in whether they include or excludenuclear power in particular. At an aggregate level, however, these lists sharemany of the same technologies, especially those concerning energy efficiencyand renewable energy sources, which are the focus of this chapter. Of course,the technologies vary in their cost- effectiveness in reducing greenhouse gas(GHG) emissions and in the scale of deployments required for them to havenotable effects.8 Among them, carbon capture and sequestration is often men-tioned as the most important, particularly with regard to coal- fired power plants;however, because its commercialization is still perhaps a decade or even morein the future, it is not included in this chapter’s analysis of flows and barriersto them. Otherwise, however, energy efficiency technologies, renewables suchas wind and solar, and biofuels, which are all widely mentioned as key tech-nologies, are included in the present analysis. These key technologies areevident in the many lists that have been developed by numerous organizationsand authors. As noted further below, however, there are significant variationsin the appropriateness of some technologies, depending on the level of eco-nomic and technological development of the recipient countries.

Stern provides a list of nine types of technologies that could reduce carbonemissions in the energy sector: efficiency, carbon capture and storage, nuclear,biofuel, combined heat and power, solar, wind, and hydropower.9 An Environ-mental Technologies Action Plan developed by an advisory group of theEuropean Commission includes fifty- one categories organized in a matrix basedon two dimensions.10 One dimension is industry sector— for instance, energy supply— whereas the other consists of a combination of energy efficiency andrenewables, carbon sequestration, and hydrogen and fuel cells. The U.S. Cli-mate Change Technology Program itemizes hundreds of technologies, which

Thomas L. Brewer 97

van Bork (2006); IEA/OECD (2006); Sugathan (2006); and World Bank (2007). Furthermore, atthe World Trade Organization, classification issues are different for goods and services becausethe agreement on goods (GATT) and the agreement on services (GATS) use different product clas-sification schemes (Brewer, forthcoming).

6. Pacala and Socolow (2004); also see Socolow (2006) and Socolow and Pacala (2006).7. UNFCCC (2006b).8. The sources for GHG emissions (Vattenfall 2007) and for effects (IEA 2008) provide exten-

sive analyses in easy-to-compare formats of the wide range of technologies that are available nowor in the next few decades.

9. Stern (2007, 259),10. European Commission (2003).

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are listed in “current portfolios” and “future research directions.”11 They areorganized according to end- use/infrastructure (for example, transportation),energy supply (hydrogen), carbon capture- storage (geologic storage), non–carbon dioxide GHGs (methane from landfills), and measuring and monitor-ing capabilities (oceanic carbon dioxide sequestration). A list of renewableenergy goods from the U.S. Trade Representative is more narrowly focused.12

A list of technologies developed by Lehman Brothers investment bank includesrenewables (hydropower, geothermal power, wind, solar, ocean, and biomass),carbon capture and storage, integrated gasification combined cycle, and nuclearpower.13 The World Bank has developed a list of technologies for energy pro-duction, supply, and end use that includes many of the same technologies asthe other lists.14

The Technology Needs Assessments conducted in developing countries forthe UNFCCC Secretariat provide both much commonality and much variationin the kinds of technologies that are viewed as important. A summary of thereports for over twenty countries found that the following were among the “keytechnologies”: “renewable energy for small- scale applications, such as biomassstoves; combined heat and power; and energy-efficient appliances and build-ing technologies such as compact fluorescent light bulbs. For transport, trafficmanagement and cleaner vehicles for public transport were most important.”15

Additional technologies and variations among countries are evident in indi-vidual country reports. The top priorities for Ghana, for instance, includedindustrial energy improvements (including boiler efficiency enhancement),methane gas capture from landfill sites, biofuels (from jatropha, an oilseedplant), and energy- efficient lighting (compact fluorescent bulbs).16

Some countries have developed extensive, industry- specific needs, whichof course also vary across countries. Vietnam, for instance, lists ten quite spe-cific GHG- reducing technologies that are needed in its cement industry— amongthem, “large vertical roller mill for raw material crushing, . . . vertical rollermill for coal crushing, . . . high- efficiency separator in the finishing process,. . . burning used tires as substitute for cement kiln.” As of April 2008, therewere thirty- nine country reports in various stages of completion, some of themextremely detailed; Indonesia’s, for instance, was 299 pages long. Individuallyand collectively, they offer developing country perspectives that are in somerespects quite different from those of the developed countries. Yet, at the same


11. U.S. Climate Change Technology Program (2006).12. U.S. Office of the Trade Representative (2006).13. Lehman Brothers (2007).14. World Bank (2006a, 10).15. Stern (2007, 564–65).16. Stern (2007, 565).

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time, there are many similarities. See for instance, a summary table of “thepromise of technology” in a UNFCCC report.17

Although such lists tend to identify “new” or otherwise “alternative” tech-nologies, it should not go unnoticed that “old” technologies are also relevant.For instance, turboprop aircraft engines are much more fuel efficient than jetengines. As a result, orders for medium- range turboprop planes have beenincreasing substantially, particularly by airlines in Europe, which have usedsuch technology extensively for many years but had been gradually replacingthe turboprop planes with jet planes. In the maritime shipping industry, thereis interest in a step “backward” to readapt the use of wind power on large mer-chant vessels by the use of large sails; a vessel thus equipped as a pilot projecthas made a long- distance ocean voyage.

Climate change adaptation technologies have not yet been so systematicallyor explicitly identified, nor have they been the subject of such extensive inter-est, compared with mitigation technologies. However, the UNFCCC hasidentified a diverse variety of technologies for adaptation, including for coastalzones, water supplies, agriculture, and health.18

Beyond common notions of technology and an openness about the relevanttechnologies for mitigation and/or adaptation, the two paradigms of climatechange technology transfer are quite different in their principal features. It isuseful to briefly examine each one.

Paradigm I: North- South Technology and Financial Flows

Paradigm I, which is currently dominant, is reflected in numerous documentsproduced over time in the implementation and negotiating processes of theUNFCCC.19 Although there has been some increased interest in South- Southtransfers,20 the predominant focus remains on North- South technology trans-fers and North- South financial transfers, particularly through bilateral andmultilateral official development assistance (ODA) channels.

Paradigm II: Global Technology, Trade, and Investment Flows

Paradigm II exhibits key differences from Paradigm I. First, it reflects thefact that there are significant technology transfers among many groups of coun-tries, including from developing countries to developed countries as well as toother developing countries, and of course among developed countries. Second,

Thomas L. Brewer 99

17. UNFCCC (2004, 63).18. UNFCCC (2006c).19. UNFCCC (2002, 2006a, 2006c, 2007a).20. For example, see South Africa (2006).

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the technology flows occur, in substantial part, as a result of trade and foreigndirect investment (FDI) flows.

Comparing the Paradigms

Table 4-2 provides a side- by- side summary comparison of the two para-digms. Of course, the conceptualizations are useful only insofar as they reflectempirically valid representations of reality and/or offer relevant policy pre-scriptions. Thus, the remaining sections of the chapter turn to evidenceconcerning the flows, barriers to them, institutional frameworks, and then thepolicy implications.

Patterns of International Flows

The data given in table 4-3 provide aggregate perspectives on key featuresof international investment flows. First, the relative magnitudes of ODA flowsremain quite small. (This fact, of course, is a basis of the Paradigm I policyprescription for more ODA.) Bilateral ODA and multilateral ODA in 2000 wererespectively only 0.7 and 0.4 percent of total gross fixed capital formation innon–Annex I countries.21 Second, international direct investment and interna-


21. Annex I is an annex in the UNFCCC. “Annex I” countries are those that committed them-selves as a group to reducing their emissions of the six greenhouses gases by at least 5 percent

Table 4-2. Summary Comparison of Paradigms

Paradigm I: Paradigm II:North-South Technology Global Technology, Trade,

Elements of Paradigm and Financial Flows and Investment Flows

Flows: geography North to South South-NorthSouth-SouthNorth-NorthNorth-South

Flows: units of analysis Countries’ financial flows Firms’ trade and investment in goods and services

Barriers Technological-administrative Trade and investment policies capacities and intellectual in all countriesproperty rights policies indeveloping countries

Institutional frameworks International development banks Multilateral, regional, and and bilateral official bilateral trade and investmentdevelopment assistance agreements and organizations

Source: Developed by the author.

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tional debt are both on the order of hundreds of billions of dollars per year,compared with total ODA flows on the order of hundreds of millions.22 Third,international investments are overwhelmingly flowing into Annex I countries,with non–Annex I countries receiving only about 9 percent of the total in 2000.

Thomas L. Brewer 101

below 1990 levels from 2008 to 2012. “Non–Annex I countries” are developing countries that arenot listed in Annex I and thus have no emissions reduction targets.

22. There are numerous conceptual and empirical issues about the precision of data about FDIand other investment flows—issues that are beyond the scope of this chapter. For present purposes,these data are useful as indicators of approximate relative magnitudes. Readers who are interestedin detailed discussions of these data-quality issues should consult the annual reviews of interna-tional direct investment by UNCTAD and world debt by the World Bank.

Table 4-3. Sources of Global Investment in Gross Fixed Capital Formation (GFCF)

FDI International Bilateral Multilateral Total GFCFFlows Borrowing ODA ODA Domestic (billions of

Sector (percent) (percent) (percent) (percent) (percent) dollars)

All sectors 17.9 17.2 0.1 0.1 64.7 7,750Agriculture, hunting, 1.0 5.4 0.3 0.2 93.1 175

forestry, fisheriesMining 33.2 0.2 0.2 0.4 66.4 139Manufacturing 22.1 6.0 0.0 0.0 71.9 1,301Electricity, gas, water 12.2 16.4 1.7 0.9 68.8 257Transport, storage, 16.7 16.8 0.5 0.4 65.5 889

communications

In Annex I countries onlyAll sectors 12.5 19.4 0.0 0.0 68.1 6,014Agriculture, hunting, 0.0 8.9 0.0 0.0 91.1 104

forestry, fisheriesMining 0.8 0.3 0.0 0.0 98.9 68Manufacturing N.A. N.A. N.A. N.A. N.A. 858Electricity, gas, water 0.0 18.5 0.0 0.0 81.4 186Transport, storage, 0.3 22.2 0.0 0.0 77.5 630

communications

In non–Annex I countries onlyAll sectors 10.2 3.8 0.7 0.4 85.0 1,654Agriculture, hunting, 1.7 0.2 0.8 0.5 96.9 68

forestry, fisheriesMining 17.8 0.0 0.4 0.1 98.9 69Manufacturing 15.3 0.5 0.1 0.0 84.1 443Electricity, gas, water 12.6 5.8 0.6 3.3 77.7 67Transport, storage, 8.9 1.5 1.7 1.4 86.4 248

communications

Source: Excerpted by the author from UNFCCC (2007, tables 35.1–31.7). Data are for 2000.Note: FDI = foreign direct investment. ODA = official development assistance. Annex I is an annex in the UNFCCC. The “Annex I”

countries are those that committed themselves as a group to reducing their emissions of the six greenhouses gases by at least 5 percentbelow 1990 levels from 2008 to 2012. Specific targets vary from country to country. The “non–Annex I countries” are developing coun-tries that are not listed in Annex I and thus have no emissions reduction targets (from www.unfccc.org). N.A. = not applicable.

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Finally, international flows are about one- third of total world gross fixed cap-ital formation, compared with two- thirds from domestic sources.23

The sectoral distributions are also evident in table 4-3. For non–Annex Icountries, in particular, the relative importance of FDI flows— in mining; man-ufacturing; electricity, gas, and water; and transport, storage, and communications— is evident. Whereas FDI flows are between 9 and 18 percent in each of thosesectors, ODA is only 4 percent at most, and less than 2 percent in four of thefive sectoral categories.

As for sustainable energy sectors, data from the United Nations Environ-ment Program indicate that in 2006, three industries received most of the investment— wind (27 percent), biofuels (18 percent), and solar (11 percent)—with other renewables and energy efficiency receiving less than 5 percent each.24

Relatively large proportions of world investment in sustainable energy aremade in Europe and the United States, which together accounted for about $50billion, or two- thirds of the world total, in 2006. China accounted for about $6billion, and India about $4 billion. Of course, projections of the geographic andsectoral patterns and trends are of special interest for the future of climate changemitigation and adaptation.25

Developing Countries as Technology Sources, and South- South Transfers

Table 4-4 reveals that several developing countries are world leaders in avariety of key climate friendly technologies. They include not only China innumerous technologies (coal gasification, compact fluorescent lightbulbs, solarvoltaic cells, and wind power) but also South Africa in coal–to–synthetic fuelstechnologies, and Mexico in solar hot water heaters. As for biofuels, althoughrecent studies have undermined claims about the net GHG- reducing effects ofsome ethanol sources, especially when made with U.S.-produced corn, thereis continuing interest in Brazil’s world leadership in the production of ethanolusing sugarcane, particularly if and when it does not involve the destruction ofthe rain forest to create the sugar plantations.

India is well known already for its wind power industry, as noted in moredetail below. Its leadership in the use of jatropha tree berries as a second- generation feedstock for biodiesel production is less well known and still in itsinfancy; India has already been involved in numerous projects for transferring


23. Because some foreign direct investments are partially financed from local host countrysources, the distinction between international and domestic sources, as revealed in balance of pay-ments statistics, is not entirely accurate.

24. UNEP (2007, figure 5).25. These projections can be found in reports of the IEA (2008), UNFCCC (2007b), World

Bank (2006b, 2007), and Cambridge Energy Research Associates (2008).

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jatropha- based biodiesel technology to other developing countries, includingGhana, Indonesia, Mozambique, and the Philippines.26

Other examples of South- South transfers of climate change– mitigating tech-nologies abound. For example, China has assisted in the construction of overseventy small- scale biogas digesters for manure decomposition– methane pro-duction in twenty- two countries and provided training in their use. And ceramiccookstoves that provide 20 to 50 percent efficiency gains over conventionalcharcoal stoves were developed based on a collaboration between firms inKenya and Thailand and have been used by more than 700,000 homes in Kenya,as well as in other African countries.27

Foreign Direct Investment and Multinational Firms

Paradigm II not only includes technology flows emanating from non–AnnexI developing countries— whether to other developing countries or to Annex I countries— it also posits that technology flows are typically embedded in thetrade and FDI flows of firms, particularly large multinational firms. Some ofthese multinational firms— indeed, an increasing number— are themselvesbased in developing countries.

Two such firms based in India are notable examples. One is Suzlon, whichis a world leader in wind turbine and gearing technologies and has foreign sub-sidiaries and other affiliates in the United States and several European countries,as well as China.28 The other Indian firm is Tata, the well- known diversified


26. For details see FO Licht’s World Ethanol & Biofuels Report (Agra Europe 2006 and 2007).27. For details on these and other examples see UNFCCC (2006b).28. For details see Alavi (2007, 15) and Lewis (2007, table 2).

Table 4-4. Developing Country Leaders in Climate Friendly Industries and Products

Industries and Products Developing Country Leaders

Biofuel (ethanol) Brazil (sugarcane feedstock and refining processes)Biofuel (biodiesel) India (jatropha, next-generation feedstock)Coal gasification ChinaCoal to synthetic fuels South AfricaCoal to hydrogen China“Clean” coal MexicoCompact fluorescent lamps China, IndonesiaHeat pumps ChinaSolar photovoltaic cells China (third leading producer, after Germany and Japan)Solar hot water heaters MexicoWind energy China, India

Source: Compiled by the author from Socolow (2006) and World Bank (2008).

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conglomerate with extensive business interests in energy, transportation, andother climate relevant industry sectors. It has wholly owned subsidiaries, jointventures, and other forms of international business relationships for R&D andmanufacturing in more than two dozen countries.29

Of course, there are many other large multinational firms with significantroles in the development and international dissemination of leading- edge tech-nologies in the wind power industries and more generally in the energy sector,and they are mostly headquartered in Annex I countries. General Electric andSiemens are two well- known examples. What is especially noteworthy aboutthem in the present context is that they both have extensive climate change–related energy R&D activities in China and India.

More generally, all these firms— Suzlon, Tata, General Electric, and Siemens— illustrate a basic fact about international technology transfer: It takesplace to a great extent within multinational firms’ internationalized R&D andmanufacturing processes, sometimes with collaborators from local host coun-tries. In fact, the research- development- diffusion process for any one giventechnology often involves many firms in many countries.

Although these examples are large multinationals, it should not be assumedthat large firms are the only important sources of technology innovation or inter-national diffusion. Indeed, small and medium- sized firms are often theoriginators of new technologies and even the principal internationalizers ofthem. For instance, small and medium- sized firms have been instrumental inthe development of biodiesel technology in many countries. A current exam-ple is the development of hybrid biodiesel- electric pickup trucks by firms inIndia and the United States.

Further, it should be noted that large multinational firms are often accusedof limiting the effective transfer of technologies into local foreign economies;they often prefer to keep key technologies internalized with the firm— includingwithin their foreign affiliates— rather than allow their technologies to be exter-nalized, because such technologies are frequently a source of these firms’competitive advantage over their rivals. In fact, the internalization of these tech-nologies is a core concept in the prevailing theories of multinational firms andFDI.30 Multinational firms are, therefore, themselves sometimes barriers to theinternational transfer of technologies.31


29. For details see Tata website (www.tata.com [November 2006]).30. Brewer and Young (2000, 2009); Cantwell (2009).31. Although intellectual property rights are sometimes used as a formal way to protect explicit

proprietary technology, the internalization of explicit and tacit technologies within the managerialprocesses of firms is a more significant barrier.

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Government Policy Barriers to International Flows

The nature, availability, and quality of the evidence about government pol-icy barriers to international technology transfers is highly variable. Tariff dataon trade in goods are the most readily available and the most easily compara-ble across countries and over time because of the widely used HarmonizedSystem developed by the World Customs Organization and used in World TradeOrganization (WTO) negotiations. Nontariff barriers (NTBs) to trade in goodsare more problematic to identify and measure, but they can be estimated interms of their tariff equivalents, as illustrated further below. Measuring theimpact of barriers to international service transactions is yet more challengingbecause there is less consistency in the categories used to describe such trans-actions, though the WTO and the United Nations have both used service industryclassification systems. Finally, barriers to FDI are also sometimes difficult toidentify and measure, though they are subject to annual reviews by the UnitedNations Conference on Trade and Development in its World Investment Report.32

Of these many forms of barriers to international technology transfer for cli-mate change mitigation or adaptation, this chapter considers tariffs— and, to alesser extent, NTBs— as they pertain to trade in goods. Table 4-5 contains evi-dence about the tariff levels affecting the energy efficiency of buildings. It isclear that the tariff levels of the three non–Annex I countries (Brazil, India, andMexico) are generally higher than those of the Annex I countries (Canada, Euro-pean Union members, Japan, and the United States). Except for Canadian tariffsof 15.1 percent on walled insulating units of glass, in every instance thenon–Annex I countries’ tariffs are higher. Of course, these are not only obsta-cles to North- South technology transfers, they are also obstacles to South- Southtransfers.

Impediments to trade in climate friendly products among developing coun-tries are more explicitly shown in table 4-6. In this table, the technologies andtheir developing country sources are identified in the top two rows, and the lev-els of the tariffs and NTBs to importing them in five developing countries areindicated in the lower rows. With few exceptions, the tariffs are in the two- digitrange, and the NTBs, expressed as tariff equivalents, are in the two- to three- digit range. Thus, there are substantial barriers to South- South technologytransfer through trade in these climate friendly goods.

EU tariffs of as much as 66 percent on compact fluorescent lightbulbs (CFL)imported from China are an especially noteworthy and timely example of bar-


32. The 2007 report, the most recent available at the time of writing, is available at the web-site of the United Nations Conference on Trade and Development (www.unctad.org/Templates/Download.asp?docid=9001&lang=1&intItemID=4361 [March 2009]).

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riers to South- North trade in a climate friendly technology. Although rational-ized on antidumping grounds, these tariffs led to a precipitous decline in ChineseCFL exports to Europe and the concomitant collapse of numerous Chinese CFLmanufacturers.33

U.S. limits on tax credits for purchasers of hybrid fuel automobiles is anexample of a barrier to North- North transfer of a climate friendly technology.The United States imposed de facto, firm- specific quotas (without explicitlynaming the firms) on the number of hybrid fuel automobiles produced by anyone manufacturer that could receive a tax credit— quotas that happen to affectonly Japan- based manufacturers, because their hybrids are the best- sellingmodels in the United States.

Table 4-7 indicates for the wind energy industry that barriers to trade in ser -vices and to FDI, along with tariffs on trade in goods, can be significant obstaclesto international technology transfers. Further, the types of products (whethergoods or services) interact with the types of barriers (whether specially tar-geted, for defined products, or generic across products).

In the WTO, governments’ commitments on trade and investment liberal-ization, as specified in the General Agreement on Tariffs and Trade (GATT)and the General Agreement on Trade in Services (GATS), respectively, are indi-cated in terms of products. This approach has been challenged by India in itsresponse to the EU–United States proposal for eliminating tariffs on climatefriendly goods; instead of product- specific liberalization, India has proposed


33. The tariffs were in effect for seven years, from mid-2001 until late 2008.

Table 4-5. Illustrative Tariffs Affecting Energy Efficiency of Buildings

Tariff Rate (percent)

Multiple-Walled Fluorescent Insulating Other Glass- Lamps, Hot

Units of Glass Fiber Products Cathode ThermostatsCountry or Group (HS 7019.90) (HS 8419.50) (HS 8539.31) (HS 9032.10)

Non–Annex I countriesBrazil 12.0 18.0 18.8 18.0India 60.0 35.0 100.0 60.0Mexico 11.7 9.2 15.0 15.0

Annex I countriesCanada 15.1 1.2 9.7 5.7European Union 8.0 1.2 3.6 2.8Japan 0.0 0.0 0.0 0.0United States 5.8 3.4 3.2 3.6

Source: Compiled by the author from OECD (2001, annex 3); and Steenblik (2006, 54–55, 70).Note: Tariff rates are applied most-favored-nation rates, in effect c. 2000; HS = Harmonized System of Tariff Classifications.

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04-0298-6 ch04:Layout 1 7/29/09 10:05 AM Page 107

project- specific reductions because many of the products are dual use and thuscan be used for purposes other than climate change mitigation.34 However, therehas been an impasse over this suggestion, because the EU and the United Statescontinued to favor a product- specific approach. A compromise consisting of acombination was also being considered.

Although the emphasis in the present analysis is on government interna-tional trade and investment policy barriers to international technology transfers,it should also be noted that “domestic” government regulations, subsidies, andother policies are also important determinants of technology flows. The sig-nificance of such policies— or their absence, in some instances— as incentivesor disincentives is emphasized in Gallagher’s study of the automotive industryin China.35

International Institutional Frameworks

There is already a wide range of both climate change and trade- investmentinternational institutional arrangements that affect technology transfers, andthey exist at the bilateral, regional, and plurilateral levels as well as the mul-


34. See the International Centre for Trade and Sustainable Development publication (ICTSD2006) and especially the contributions by Sell (2006) and Sugathan (2006).

35. Gallagher (2006).

Table 4-7. Interactions of Wind Energy Products and Barriers to International Trade,Investment, and Technology Transfer

Type of Barrier to International Trade, Investment, and Technology Transfer

Type of Product: Specifically Defined Categories Generic acrossGoods and Services Targeted for Product Groups Product Groups

Specific good or service: Tariffs on imported Tariffs on blades FDI local joint venture windmill generators windmill generators of various types requirements for

manufacturing facilities

Dual use: electrical Tariffs on electrical Safety certification Import inspection wires wires requirements for policies

electrical goods

General: construction Restrictions on Licensing of Restrictions on engineering services cross-border trade engineering movement of

in construction services firms natural personsengineering services

Source: Developed by the author from information in Barton (2007, 20–30); also see Lewis (2007).

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tilateral level (see table 4-8). The analysis here focuses on the multilateralinstitutions.

To date, the multilateral institutional arrangements for the climate regimemanifest the emphases of Paradigm I on technology flows and financial flowsfrom North to South. This is evident in particular in the work of the UNFCCCExpert Group on Technology Transfer, whose mandate is to facilitate the imple-mentation of Article 4, paragraph 5, of the UNFCCC:

The developed country Parties and other developed Parties included in Annex II shalltake all practicable steps to promote, facilitate and finance, as appropriate, the transferof, or access to, environmentally sound technologies and know- how to other Parties,particularly developing country Parties, to enable them to implement the provisions ofthe Convention. In this process, the developed country Parties shall support the devel-opment and enhancement of endogenous capacities and technologies of developing


Table 4-8. Existing International Institutional Arrangements Concerning ClimateChange and Trade

Type of Arrangement Climate Change Trade and Investment

Multilateral UN Framework Convention World Trade Organization:on Climate Change General Agreement on Tariffs

Kyoto Protocol and TradeOther UN agencies General Agreement on TradeInternational financial in Services

institutions Trade-Related IntellectualGlobal Environment Facility Property Rights

Dispute SettlementUnderstanding

Regional Asia-Pacific Partnership Asia-Pacific Economic Cooperation, European Union,Mercosur, North American FreeTrade Agreement, others

Bilateral United States–Brazil, Free trade agreements, bilateral Sweden, others investment agreements

European Union, othersJapan, others

Plurilateral/sectoralAviation Pending International Civil Aviation Shipping Pending OrganizationOthers International Maritime

Organization

Source: Compiled by the author from various documents of the UNFCCC, WTO, other organizations and governments. Note: These are not exhaustive lists.

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country Parties. Other Parties and organizations in a position to do so may also assistin facilitating the transfer of such technologies.36

Similar emphases are evident in the Bali Action Plan, which calls for

. . . (d) Enhanced action on technology development and transfer to support action onmitigation and adaptation, including, inter alia, consideration of: (i) Effective mecha-nisms and enhanced means for the removal of obstacles to, and provision of financialand other incentives for, scaling up of the development and transfer of technology todeveloping country Parties in order to promote access to affordable environmentallysound technologies; (ii) Ways to accelerate deployment, diffusion and transfer of afford-able environmentally sound technologies; (iii) Cooperation on research and developmentof current, new and innovative technology, including win- win solutions; (iv) The effec-tiveness of mechanisms and tools for technology cooperation in specific sectors.37

Furthermore, there is increasing interest in the nature and extent of tech-nology transfers associated with Clean Development Mechanism and JointImplementation projects,38 and the effects of host country investment and reg-ulatory policies on the features of such projects.39

The Global Environment Facility, the various carbon programs at the WorldBank, and the new Clean Energy Fund to be administered by the World Bankare also all important elements of the current multilateral system for fundingtechnology transfers to developing countries. Because they are all likely tobecome much larger in the next few years, they will become increasingly sig-nificant, and they can be used to leverage other funding sources. Yet the amountsof funds are likely to remain small in relationship to the technology flows asso-ciated with trade and investment through private channels.

Paradigm II, of course, implies that the international institutional arrange-ments for trade and investment are also relevant to international technologytransfers for climate change mitigation and adaptation. An extensive analysisof the complexities of those arrangements would be far beyond the scope ofthis chapter.40 However, it can be briefly noted that the coverage is highlyuneven across products (goods or services), methods of technology transfer(trade or FDI), and the geographic scopes of the agreements (multilateral, pluri-lateral, regional, bilateral). At the WTO, in particular, the coverage of methodsof technology transfer varies significantly between the GATT for goods and


36. The work of the Expert Group on Technology Transfer is discussed in detail in UNFCCC(2006a); its first work program is summarized in UNFCCC (2002), and its most recent work pro-gram is summarized in (2007a). Its clearinghouse for technology transfer information is accessibleat www.ttclear.unfccc.int.

37. This is from www.unfccc.int (March 2008).38. DeConinck, Haake, and van der Linden (2007).39. Anger, Bohringer, and Moslener (2007).40. For the details, see Brewer (2008c).

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the GATS for services (see table 4-9). Further, because of the limited coverageof FDI in the WTO, the FDI provisions of regional and bilateral agreementsare particularly important, and there are many hundreds of them.41

Implications for International Institutional Architectures

The negotiating agendas in both the international climate change and trade- investment arenas also need to take into account the broad array of barriers tointernational technology transfers for climate change mitigation or adapta-tion.42 Multilateral and bilateral official development assistance levels need tobe increased significantly. But that is not enough, because most technologytransfers occur through private international trade and FDI transactions, andthey encounter diverse barriers. Further, the barriers are in Annex I countriesas well as non–Annex I countries.

Paradigm II implies the need for more attention to South- North and South- South and even North- North technology flows, as well as the traditional focuson North- South flows in government policymaking and international negotia-tions. In this context, the role in international technology transfers of multinationalfirms based in developing countries— and barriers to them— need to be exam-ined more thoroughly.


41. WTO (2008).42. On international institutional architecture issues more generally, see especially Aldy and

Stavins (2007).

Table 4-9. Methods of International Technology Transfer, Climate Friendly TechnologyExamples, and Coverage in the World Trade Organization

Methods Goods Services

Production in exporting country / GATT: tariffs and GATS: “consumption abroad”consumption in importing country nontariff barriers

Foreign direct investment, GATT/TRIMs only GATS: “commercial presence” including joint ventures (that is, foreign direct investment)

Temporary relocation of Not covered GATS: “movement of natural employees persons”

International migration of skilled Not covered Not coveredpeople

Licensing TRIPS TRIPS

Note: GATT = General Agreement on Tariffs and Trade; GATS = General Agreement on Trade in Services; TRIMs = Trade-RelatedInvestment Measures; WTO = World Trade Organization; TRIPS = Trade-Related Intellectual Property Rights.

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This suggests at least one obvious basis for a division of labor in the emerg-ing international institutional architecture for the joint climate- trade agenda:The UNFCCC, World Bank, and other international development institutionsshould continue to focus their efforts on North- South financial flows and capac-ity building in developing countries to enhance technology transfers. At thesame time, the WTO and other trade- investment institutions should substan-tially increase their efforts to reduce barriers to trade and FDI in climate- relatedtechnologies. These efforts should include barriers in Annex I countries as wellas non–Annex I countries. Further, the efforts should be undertaken with a recog-nition that barriers in non–Annex I countries are barriers to the exports and FDIfrom other non–Annex I countries as well as Annex I countries.

At the multilateral level, these efforts can be conducted largely on parallel tracks— one involving the international climate change and international devel-opment institutions, the other involving the international trade- investmentinstitutions. However, there should be a more formalized liaison establishedbetween the two sets of institutions. This could be done through many institu-tional arrangements, for instance, a climate- trade liaison committee that includesthe UNFCCC, United Nations Environment Program, WTO, and World Bank.

There is, however, a much more complex and challenging problem in the cur-rent array of bilateral, regional, plurilateral, and multilateral arrangements. Thenewly formed international institutional arrangements for climate change, inaddition to the already- existing ones for trade and investment, have created a“system” that is doubly fragmented as far as the joint climate- trade agenda isconcerned. Some of the bilateral, regional, and plurilateral arrangements mightbe justified on administrative and economic grounds as well as domestic andinternational political grounds. However, there are daunting analytic and poli-cymaking challenges in trying to integrate them into the new internationalinstitutional architecture that will likely continue to have a wide array of mul-tilateral climate, trade- investment, and financial institutions at their center.

There are yet more complex and significant issues about the relationshipsbetween technology agreements and other elements of the post-2012 climateand trade regimes. For instance, access to technology transfer funds or denialof access to them— including those already in existence and others yet to be created— could be used as “carrots” or “sticks” to create incentives for gov-ernments to undertake unilateral mitigation measures or to meet theirinternationally agreed- on obligations. Another example is the possible use of trade- investment- technology transfer sanctions to deter “free riders” on mul-tilateral agreements.43


43. See Brewer (2003, 2004).

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Finally, no matter how international technology transfer issues may evolveon the joint agenda for climate change and trade- investment- technology trans-fer, significant domestic political forces will shape the agenda and influencegovernments’ and firms’ choices. Those forces will reflect the familiar featuresof the domestic politics of international climate change and international trade- investment- technology transfer issues. Whether they will prevent progress inthe development of constructive responses to the new joint agenda— and howto overcome them— is yet another issue for further analysis.


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Comment

Comment by Muthukumara Mani

Although the largest share of historical and current global emissions ofgreenhouse gases has originated in developed countries, developing coun-tries will soon account for a greater share in the growth of world carbondioxide (CO2) emissions from fossil fuel combustion than developed coun-tries. The International Energy Agency’s projections suggest that non–AnnexI countries will overtake the Annex I countries as the leading contributors toglobal emissions in the 2030s. Non–Annex I countries’ share of global emis-sions will soar from 38 percent in 2002 to 52 percent in 2030, while AnnexI countries’ share will decline from 60 to 47 percent. In other words, morethan 70 percent of the world emissions increase from 2020–30 will come fromnon–Annex I countries. China alone will contribute about a quarter of theincrease in CO2 emissions, or 3.8 gigatons, reaching 7.1 gigatons in 2030.Strong economic growth and heavy dependence on coal in industry and powergeneration will contribute to this trend.

Countries (both developed and developing) have implemented variouspolices and measures to achieve their targets and have shown some progressin mitigating the effects of climate change. However, in a number of cases, eco-nomic considerations have far outweighed their consideration for the globalclimate. While a number of low carbon growth options exist for reducing ournet greenhouse gases, the key to achieving this would be to move toward lowcarbon or no- greenhouse- gas- emitting technologies.

There are already a number of lowcarbon technologies available to com-bat climate change, and it is now widely accepted that the stabilization ofgreenhouse gas concentrations to as low as 450 parts per million CO2 equiva-lent can be achieved by deploying currently available technologies, which areexpected to be commercialized in the coming decades. It could come in a most

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effective and efficient manner by allowing lowcarbon growth in developingcountries.

In this regard, international technology transfer can be a significant and cost- effective component of climate mitigation efforts in developing countries thatbalances their economic considerations. Current mechanisms of technologytransfer through the Kyoto Protocol’s Clean Development Mechanism haveproved cumbersome and inadequate. Therefore, technology transfer and dif-fusion through the traditional channels of trade and investment could beimportant sources of climate change mitigation, as indicated by Thomas Brewerin chapter 4.

The Stern Review in fact identifies the transfer of energy efficient and lowcarbon technologies to developing countries as critical to reducing the energyintensity of production. It further observes that “the reduction of tariff and nontariff barriers for lowcarbon goods and services, including within the DohaDevelopment Round of international trade negotiations, could provide furtheropportunities to accelerate the diffusion of key technologies.” However, in tradeand investment regimes, one encounters a different set of issues and problems.

Recent efforts to liberalize trade in environmental goods under the WorldTrade Organization have had their share of problems. The fundamental faultlines of disagreement between countries are underpinned by different per-ceptions on what “environmental goods” are (that is, the issue of definition),which would determine what goods to include or not for liberalization underthe mandate and how to liberalize (that is, the issue of approaches to liberal-ization) in a manner that addresses the interests of both developed anddeveloping countries.

The key issues surrounding what to liberalize include (1) dealing with sin-gle versus dual- use goods; (2) the relative environmental friendliness of goods;(3) dealing with constantly evolving technology; (4) assessing implications fordomestic industries, especially in developing countries; (5) dealing with non-tariff barriers; (6) enhancing opportunities for developing country exports; and(7) dealing with agricultural environmental issues.

Even if trade is or is not liberalized, foreign direct investment can be anotherimportant means of transferring technology. However, weak intellectual prop-erty rights (IPR) regimes (or perceived weak IPRs) and other barriers indeveloping countries often inhibit diffusion of these specific technologiesbeyond the project level. These barriers range from weak environmental regu-lations, fiscal feasibility, financial and credit policies, economic and regulatoryreforms, and the viability of technology to local conditions (including avail-ability of local skills and know- how). Streamlining of intellectual property


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rights, investment rules, and other domestic policies could further aid in wide-spread assimilation of clean technologies in developing countries

There is, therefore, a need in the absence of a cohesive global regime ontechnology transfer to better understand the policy and regulatory frameworkthat would facilitate a greater deployment and diffusion of clean energy tech-nologies for climate change mitigation through the broader trade and investmentchannels in both developed and developing countries.


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Five “Gs”: Lessons from World Trade for Governing Global Climate Change

Reversing the greenhouse gas (GHG) emissions of the world’s $60 trillioneconomy will be among the most complex international governance chal-

lenges ever— rivaling the forty- year effort to dramatically reduce tariffs andestablish a rules- based trading system. Given that nearly fifteen years havepassed since the completion of the last global trade pact, it is easy to forget thatthe World Trade Organization (WTO) stands tall among the great successes ofglobal governance, precisely because it was so difficult to accomplish. A coun-terpart twin tower— a global system to address climate change— can mimic thetrade regime’s most successful governance principles, and learn from its struc-tural weaknesses. Perhaps more important, as this volume’s theme suggests,the two regimes need to work diligently to avoid colliding with one another.Indeed, it would be both unfortunate and ironic if a global climate regime onlycould succeed at the expense of the global trade regime— or vice versa.

What lessons should the climate regime learn from the trade regime? It maybe helpful to break the issue down into five core questions for any attempt togovern: Who governs? What is the structure of the basic governing agreement?Where is it “binding”? When can we expect the agreement to take effect? Howdoes it bring new nations in? For each question, preliminary answers can befound in what we might think of as the five “Gs” that should govern climatechange. By looking to the lessons from the WTO, I try to make the case for aclimate regime that:

—starts with a group of major emitters, which together —forge a general agreement to tackle the issue, one that —gears up nations’ domestic action and that —organizes itself around a generational goal that —allows for the graduation of developing countries into full commitments.

121

W I L L I A M A N T H O L I S 5

The author is indebted to comments from Scott Barrett, Colin Bradford, Lael Brainard, DanielDrezner, Stuart Eizenstat, Alex Fifer, Lauren Fine, Warwick McKibbin, Carlos Pascual, Nigel Purvis,David Sandalow, and Strobe Talbott.

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In a few of these areas, such an approach can provide a road map to resolv-ing potential conflicts between the two regimes.

Who Governs? The Right Group of Nations, Matched to the Challenge

International regimes need to be designed to their purposes. Are they debat-ing forums? Are they negotiated agreements that govern in particular fields?Trade and climate change have both benefited considerably from both kinds oforganizations. This chapter assumes that concerned nations are moving towarda governing regime for GHG emissions, and that they need mechanismsequipped to address that challenge.

Since the formation of the United Nations system, two bodies have existedalong side one another on the issue of global trade, one for discourse, the otherfor governance. The UN Conference on Trade and Development (UNCTAD)has largely functioned as a forum for assessing the twin goals and accom-plishments of trade and development. Alongside it, the General Agreement onTariffs and Trade (GATT) and its successor, the WTO, have been the govern-ing body for global trade. Though some might find it odd to point to the WTOas a successful model of international governance (especially given recent dif-ficulties in completing the Doha Round of multilateral trade negotiations), itis easy to forget how significant its contributions have been to both interna-tional cooperation and to economic growth over the last sixty years.1 TheGATT/WTO system began as both a smaller (in terms of membership) and moreambitious (in terms of governance) world body than UNCTAD when a groupof the right countries decided to work together.

Lesson learned: Size matters. When it comes to global governance, it wasand is easier to get things done with a smaller number of the right countries.The GATT process was managed by the biggest and most technically compe-tent trade players— the so- called Quad of the United States, Japan, Canada,and Europe. Occasionally, when formal negotiations bogged down, the Groupof Seven (and later, the Group of Eight) would weigh in to give the talks aboost, such as in 1978 and 2001, when the leaders themselves helped spur break-


1. That success was apparent twenty-five years ago, when the GATT system was held up asthe model for global governance—including among “realist” theorists of international relations,who tend to hold a dim view for institutions. See Ruggie (1983). Though Ruggie would not clas-sify himself as a realist, his general argument was accepted by realists such as Krasner. In the realworld of politics, the GATT and WTO’s acceptance among American political conservatives—including their willingness to accept binding decisions by international tribunals—is striking.

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throughs leading, respectively, to the close of the Tokyo Round and the launchof the Doha Round.

As the WTO’s membership grew in size over its first five decades, negotia-tions became more unwieldy. The greatest number of new entrants came fromdeveloping countries. After an initial sorting out, the lesson of size was relearned:A new Quad was established, where India and Brazil joined the United Statesand European Union as the principal negotiators.

Further complicating matters, over the years, a plethora of regional andbilateral agreements have advanced trade liberalization worldwide. The EU hasled the pack in depth of integration and effectiveness, but the last forty yearshave seen the rise of a South American commercial union (Mercosur), the NorthAmerican Free Trade Agreement, the Southern African Customs Union, andthe Association of Southeast Asian Nations’ Free Trade Area. Of course, thereis considerable debate about whether this spaghetti bowl of different agree-ments has been good for the global trading system. Supporters of the three waystreet (that is, global, regional, and bilateral) have found “competitive liberal-ization” to be a positive force. Regional agreements help drive reluctantcountries to the global negotiations for fear of missing gains from trade. Oppo-nents see the growing complexity and difficulty of multiple trade talks to exceedthe negotiating capacity of diplomats and the political will of elected officials.Complexity is unavoidable, to be sure. That the complexity has been at all man-ageable is due, in part, to the bedrock of a rules- based system that wasestablished sixty years ago, and the committed leadership of a relatively smallnumber of players.

So what does this mean for the climate change regime? The half- true clichéabout climate change is that it is a global problem that requires a global solu-tion. Still, moving forward does not require all countries to be part of the solution— at least not at first. The UN- sponsored Kyoto Protocol process wasslowed down by trying to conduct a global research initiative on the nature ofthe challenge (largely led by the UN’s Intergovernmental Panel on ClimateChange), while also debating who was responsible for addressing the challengeand negotiating an agreement among 140 nations under the UN’s FrameworkConvention on Climate Change. Though data, debate, and dialogue were crit-ical to convincing these nations of the challenge at hand, the negotiations overwhat to do about it became rancorous and left many questions unanswered.They gave way to several more years of disputed talks on how to implementthe agreement, a lengthy and unsuccessful ratification discussion in the UnitedStates, and uninspiring results on the ground— even from enthusiastic backerslike the European Union and Japan, which face an uphill battle in meeting their2008–12 GHG emission targets. Meanwhile, the main developing country bloc

William Antholis 123

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is an eclectic group, including nations ranging from giant powerhouses suchas Brazil, China, and India to small, poor, landlocked nations in Africa to smallisland nations. With the exception of these island countries— which literallycould get washed away if there is no progress— most have been quite com-fortable with the UN’s penchant for discussion, so long as those discussionsdo not lead to binding obligations for their own economies.

In short, we have a potentially large problem coupled with a complicated,bureaucratic, and torpid negotiating mechanism. If size matters when settingup a governing regime, then the climate system needs to separate the broad andinclusive dialogue about the challenge from the more narrow and detailed chal-lenge of negotiating an agreement. The latter task is best taken by a smallergroup of nations.2

The great bulk of GHG emissions likely to spew into the atmosphere overthe next three decades— not to mention the economic and technical capacityto reverse course— can be found in fewer than two dozen countries. The cre-ation of smaller groupings— such as a Major Emitters’ Group (E-8)—couldhelp to address these challenges.3 The United States, European Union, China,Russia, Japan, and India are the top six emitters of GHGs; and South Africaand Brazil rank tenth and thirteenth, respectively, but their contributions aresignificant in representing their regions— especially Brazil, where protectingthe Amazon River Basin is a major priority in storing carbon. This same logiclies behind the major emitters’ meeting that President George W. Bush hostedin September 2007, which adds to my list of eight and includes Canada (sev-enth), South Korea (eighth), Mexico (ninth), Indonesia (twelfth), and Australia(fifteenth). Together, these thirteen countries produce more than 80 percent ofall GHGs.

Keeping the core group of negotiating nations small— and, occasionally,involving heads of state in the conversations— has one other signal virtue. Thesame set of players is at the center of WTO negotiations. As the two regimesbegin to bump into each other on a range of issues— from border surcharges


2. One commentator questioned whether the problem of protecting the Earth’s climate is anal-ogous to that of expanding free trade. As a general matter, most analysts would agree that protectingthe climate is a nonexcludable public good, whereas free trade has been less so, since only the par-ticipants in a trading regime enjoy the benefits. Some might even question whether free trade is apublic good, though cf. Kindleberger (1986). Indeed, a strong argument can be made that both aclimate regime and a trade regime offer both excludable and nonexcludable public goods. In trade,the excludable public goods are the lower tariffs and trade barriers offered to the members of theregime; the nonexcludable good is the stable international economic order that has economic andpolitical benefits for all countries. In climate change, the nonexcludable good would be climateprotection. The excludable good would be an emissions trading regime. Many thanks to LaelBrainard for helping clarify this distinction.

3. Stern and Antholis (2007b).

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to energy subsidies— resolution can be reached more easily if the same play-ers from both regimes are talking. That is especially true if heads of statethemselves are aware of the need to coordinate, and the perils of the failure todo so.

What Is the Form of Governance? A General Agreement

One of the keys to the GATT/WTO’s success is that it did not start as a globalbody but rather as a less formal arrangement. If this distinction seems unim-portant, keep in mind that the WTO started not as the successful WTO, or eventhe successful GATT, but as the failed International Trade Organization— whichwas envisioned at Bretton Woods, along with the World Bank and InternationalMonetary Fund, and whose treaty died on the U.S. Senate floor, because two- thirds of that august body was not prepared to hand over highly politicaldecisions regarding trade policy to an international organization. The negotia-tors went back to the drawing board. Only after the International TradeOrganization’s high- profile failure did they come up with the General Agree-ment on Tariffs and Trade.

The core lesson: Do not start with an international treaty organization respon-sible for data, debate, and enforcing compliance. And when it comes toenforcement, build confidence through general agreements, which are “bind-ing” in that they synchronize and increase the ambition of domestic action thatstates see as being in their best interest. For nearly fifty years, the GATT wasable to negotiate and adjudicate agreements that bound nations in a way thatless directly called national sovereignty into question. Each participating nationpledged to cut tariffs and other trade barriers in a coordinated way. Countriescould choose what counted as significant reductions, and they would often tradefast action in one area for slow action in another. Once commitments were made,they had to be enforced. An adjudicative body was established to resolve tradedisputes.

Technically speaking, the adjudicative trade body did not enforce the treaty.Member nations did. Countries monitored one another’s behavior— includingthe most economically powerful trading nations. When a plaintiff country hada complaint, it brought it to the GATT/WTO’s dispute resolution mechanism.If a defendant country lost a dispute, it had a choice: Change its domestic law,or allow a retaliatory tariff or other action by the plaintiff country. In this way,all countries felt the system to be self- enforcing. All this gave negotiators theability to say convincingly to their political masters— including general publics— that the agreement was not a sacrifice of sovereignty.


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The fear that nations will lose their sovereignty similarly has plagued theclimate change discussions. If the United States had ratified the Kyoto Proto-col, it would have been a “binding treaty.” Opponents of Kyoto claimed thatthe United States would have been liable for some set of sanctions that wouldbe administered and enforced by the mandates of the United Nations. Amer-ica’s sovereignty over its energy future— and by extension, its national security— would be subject to external intervention. As a political matter, fewAmerican politicians want to be told that they must do something, or else facesanction by a global body.

Whether or not those concerns have any factual merit, “sovereignty hawk”nations around the world (particularly the United States and much of the devel-oping world) have feared Kyoto- style obligations. Political leaders in the UnitedStates, China, India, and Brazil also have refused to sacrifice their ability tocontrol their economic destinies to a global energy regime— at least, not giveup that sovereignty in a way that diverges from national interest. Only the Euro-pean Union— whose members have grown comfortable sharing or even poolingtheir sovereignty— seems to like the idea of using an international agreementto compel domestic action.

There is another way, of course. Building on the successful GATT model,negotiators could seek a General Agreement to Reduce Emissions (GARE).Like the GATT, the GARE would effectively link domestic action with an inter-national agreement.4 It would avoid moving too quickly to a full- blowninternational institution, such as a World Environment Organization. If a “treaty”suggests that nations are tying their fates to one another, “general agreements”suggests that nations acknowledge one another’s interdependence, but alsotheir autonomy. As they build confidence in their ability to work together undersuch agreements, they may become more willing to strengthen the regime.

A GARE system could be built on the E-8 or major emitters’ group outlinedabove. A core set of the most important countries could start the process, andthis ultimately would be compatible with regional and bilateral agreements.On an annual basis, leaders of this group could meet at the summit level toevaluate progress and to help give a boost to the ongoing negotiations.

What then of the United Nations? An important role remains for the UN incontinuing to sponsor the broader climate talks as a forum for helping nationsshare information and best practices with one another. The UN also has beenpathbreaking in supporting the critical work of the Intergovernmental Panel onClimate Change— the scientific body that has helped establish that climatechange is real, and that human action is contributing dramatically. Both these


4. See the first suggestion for such an approach in Stern and Antholis (2007a).

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functions help support the negotiation and conflict resolution functions of abinding agreement. Eventually, once confidence is built in a self- enforcingagreement, the UN can be brought in to maintain the relationships.

Where Does the New Climate Regime Bind Nations? It Gears Up Domestic Steps Nations Are Willing to Take

Ask a State Department lawyer, and she will tell you that there is no differ-ence between a treaty, a congressional- executive agreement, and a presidentialbilateral statement with a foreign head of state. The United States is honor- bound to live up to its agreements, whatever form they take. If the agreementincludes consequences for violation, the United States is obligated to acceptthose. Yet in practice, nations (including the United States) frequently violateor ignore agreements— and either suffer the consequences or do not. Thoughthe UN Charter provides some instances when states may be physically com-pelled to act in accord with violating international norms, in practice this rarelyis the case for nonmilitary agreements.

What makes some international agreements binding? What makes some bind-ings succeed and others fail? There are at least three ways to discuss the successof binding agreements. First, some pacts succeed because states feel no need toviolate them. These agreements succeed because they create a structure thatallows states to do what they would prefer to do, but might not do because theyfear noncompliance by others. By giving states confidence that other states willlive up to their end of the bargain, agreements allow states to do what is in theirbest interest. This is what de Tocqueville called “self- interest rightly understood.”

Second, some agreements succeed because nations realize, upon violatingan agreement, that the net costs of doing so are not worth it. This is usually thecase when nations contemplate sanctions from an agreement— and the politi-cal impact those sanctions could have domestically and internationally— andchoose to get right by the law. Third and last, agreements work when nationssuffer appropriate consequences for their violations, and both the violatingnation and the nation that applies the sanction feel the consequences to be appro-priate and adequate.

In theory, all three cases do not require an outside enforcing body. It is gov-ernance without government, or what the great international relations theoristHedley Bull called “the efficacy of international law,” which “depend[s] onmeasures of self- help.”5 The GATT/WTO succeeded because, for its first fifty


5. See Bull (1977, 131, and chapter 6).

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years, all three forms of self- help worked. First, the commitments were suffi-ciently robust that countries could plan to cut trade barriers— that is, gear uptheir commitment— knowing that counterpart nations would do the same.GATT/WTO negotiations helped nations to cut their own trade barriers furtherthan they otherwise would. In return, counterpart nations also lowered theirbarriers. Consumers benefited from cheaper imports, and exporters benefitedfrom wider markets. Nations understood the tough domestic challenges othernations felt in trying to lower trade barriers.

This worked in practice, particularly when Congress signaled its willing-ness to lower barriers in specific product areas in advance of a negotiation.Making a priority of domestic action is actually enshrined in the domestic legalarchitecture of American trade diplomacy. From an American perspective, onereason that the United States is more easily bound by trade negotiations is thatit uses congressional- executive agreements, which require passing relativelydetailed trade promotion authority in advance of negotiations. As a result, thetrading system aspired toward laissez- faire goals as a general matter acrossnational boundaries, but also accepted that national legislation was central tomoving forward. Though laissez- faire remained a long- term goal, no singleround or negotiation ever proposed to complete the process and each succes-sive round depended on national action. The system recognized the domesticpolitical and economic constraints that nations face in moving toward a glob-ally integrated goal.6

Second, the GATT’s enforcement system sustained national cuts withoutappearing to undermine sovereignty. When a nation was found to be in viola-tion of a trade rule, it had a choice: Change its trade practice, or accept reciprocaltrade sanctions on other goods. Even under trying circumstances, nations werewilling to go back and change domestic law in order to come into compliance.In these instances, countries have avoided the imposition of sanctions, and theyhave been unwilling to sustain extended tit- for- tat sanctions. Third, in thosefew cases where sanctions have been applied, nations have generally been will-ing to accept them without countersanctions. Rather than starting trade wars,the GATT/WTO system has prevented them.

A similar logic can guide a GARE: Countries can choose domestically tocut their GHG emissions in the way that makes most sense, given their domes-tic constraints. Rather than prioritize a “treaty” as a goal in and of itself, a GAREwould start with domestic legislation and help nations strengthen— that is, gear up— their ambition.

Nearly all nations recognize that cleaner energy production and the protec-tion of forests are worthwhile goals in themselves, and that they should act to


6. See Ruggie (1983).

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prevent irreversible climate change. Almost all nations have taken some stepsin this regard. And a diversity of approaches is appropriate. Countries useenergy and regulate pollution very differently, and they also differ widely intheir capacity to track emissions and enforce compliance. The United Statesand China, for instance, are particularly dependent on carbon-intensive indus-tries such as coal. Brazil, conversely, has huge sources of renewable resources,such as hydropower and biofuels, but is also struggling to save its rain forest— one of the great carbon reserves and “sinks” in the world. It is clear that a one- size- fits- all approach will not work.

The threefold challenge for the international negotiations is, first, how to getcountries to take reciprocal domestic actions; second, how to structure com-pliance so that it reinforces or returns states to mutual action; and third, howto establish sanctions that nations can choose to accept as appropriate. Thus,first, a GARE should begin in domestic action, and use the negotiating processto gear up the ambition of states. States are “bound” to follow through on actionsthey are likely to take on their own.7 One way to make sure that that is the caseis to legislate first and negotiate later. In the American context, GARE wouldtake advantage of congressional- executive agreements and avoid the treatyprocess. In a GARE, the domestic political hurdle to passage is whether to passand implement a domestic law. With the framework of such a domestic law inplace, the international negotiations can focus on the level of ambition that allcountries take, so as to help ratchet up ambition. The diplomatic challengebecomes whether that level of commitment is acceptable to counterpart nations.8

This is in slight, but significant, contrast to the Kyoto Protocol’s approachof binding a state to an international organization’s decisionmaking.9 Forinstance, in the United States, the treaty process not only requires the super-majority in one house of Congress; it also requires passage of implementinglegislation in both houses. Agreements, by contrast, require majorities in both houses— first for authorization to negotiate, second for the final agreement itself.


7. For an overview of what a domestic and international approach for the United States mightlook like, see Stern and Antholis (2007a).

8. One model example for this would be the EU’s proposal to unilaterally cut their emissionsby 20 percent below 1990 levels in the post-Kyoto commitment period, and to extend those cutsto 30 percent if an international agreement is reached.

9. One advantage by not being a treaty, the GARE would avoid another major drawback ofKyoto: It would not need a two-thirds majority in the United States Senate, a minefield wherecountless treaties have gone to die. Indeed, by the treaty process, internationally agreed emissionstargets and timetables the policies and regulations needed to comply with them become deeplyenshrined in domestic law as they have been passed by a supermajority in the Senate. By contrast,the GARE would only require simple majorities in both the House and the Senate, putting thedomestic legislation horse in front of the global treaty cart—just the way it should be. See Sternand Antholis (2007a); Purvis (n.d.).

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The authorization to negotiate— so- called fast track in trade talks— gives nego-tiators a road map for what can be negotiated, and as a result begins to involvemembers of Congress in the talks themselves.10 In a real sense, for the UnitedStates, a GARE would start with domestic action, and seek to ratchet it upward,in sync with other nations.

Second, a GARE would need to be “binding” by addressing noncompliance.As with the early GATT system, it should include avenues for self- enforcedsanctions by nations. Exactly how nations will self- enforce an agreement isstill being debated. Some analysts have called for a common global carbon tax.Others have called for a “pledge and review” process, in which nations pledgeto reduce GHGs, and then review one another’s progress on a regular basis.There may be merit to both kinds of agreements. Yet neither one, on its face,appears to encourage the gearing up of domestic commitments, while also dis-couraging nations from breaking those commitments by imposing sanctionsthat deny nations the benefits of the agreement.11

One approach, in theory, does accomplish these goals: international tradingof GHG emissions. As a domestic matter, the EU has already adopted emis-sions trading, and the United States is considering such legislation, havingsuccessfully pioneered a sulfur dioxide system under George H. W. Bush inthe late 1980s. Though there have been some initial problems with the EU’ssystem, it has now done largely what it intended to do: put a price on emis-sions, and create incentives for the private sector to find emissions cuts wheremost efficient to do so.

International emissions trading would extend these advantages acrossnational borders. The United States insisted on GHG emissions trading atKyoto, and for nearly two years afterward haggled with the European Unionover the rules. Ironically enough, once the United States walked away fromemissions trading during the George W. Bush presidency, the European Unionbegan to aggressively pursue international emissions trading. Trading can hap-pen in two forms— in either a closed or an open system. In a closed system,two different national economies agree that total emissions in both economieswill not exceed a fixed amount. As long as both nations comply in the aggre-gate, permits remain of equal value and are freely tradable between countries.If one country violates its emissions limits, however, the permits in that coun-try become less valuable. In an open system, nations are responsible only fortheir own reductions, though investors or companies may seek certifiable reduc-tions in other countries, and simply be free to invest in such reductions.12


10. See Antholis and Talbott (2007).11. For a useful discussion on this, see Wiener (2007, 74–76).12. As mentioned above, establishing an emissions trading system would move from the nonex-

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Both approaches have strengths and weaknesses from a “compliance as self- help” standpoint. The strength of the closed system is that it raises the stakesfor compliance— and the penalties for noncompliance. In such a system, it ishighly advantageous for nations to make broad progress on their GARE reduc-tion commitments, as it would either force nations to seek permits from firmsthat have successfully cut GHG emissions in other nations, or provide incen-tives for nations to have the most number of such firms in their own territory.If it were possible to set up such a system, the incentives for success should behigh. Yet the cost of failure should also be high, as less successful countrieswould be forced to pay dearly for emissions permits across borders. In con-trast, an open system would create incentives for investing across borders. Thatsaid, it would provide few downsides if nations failed to comply with the inter-national agreement— other than the greater risk of failing to stabilize the climate.

The joint challenges for a GARE that relied on trading for compliance wouldbe to determine whether a member country seeking to join had proposed a strongenough target, and whether preexisting members had come close enough totheir previous commitments in each successive round of negotiations. The firsttask would need to fall to member states. The second task could fall to a jointreview panel established by GARE countries. If a country failed to meet its tar-get by reducing its emissions or buying permits, it would forfeit the right tocontinue in the GARE in future periods.13

Third, establishing a successful binding agreement requires addressing howto deal with those who refuse to join. A growing chorus is raising the idea ofusing actual trade protections— such as demanding that imported goods fromcountries that have not adopted sufficient emissions reductions would need topurchase emissions permits equivalent to their carbon footprints. The idea firstarose in countries such as France, directed at the United States for not join-ing the Kyoto Protocol. Now that the United States is contemplating joininga post–Kyoto system, Americans are considering applying the same approachto developing countries that do not take binding targets. These “border per-mits” would be a way of placing some sanction on nations that refuse to joinor comply with an emissions agreement— and thereby help share the cost ofcompliance.

This has the potential both to be a constructive way to think through theproblem but also to undermine the trade regime, the climate regime, or both.The constructive element of such an approach would be to provide real lever-


cludable public good system of climate protection to a system with excludable benefits: access totrading with other parties, with the enhanced efficiency and reduced compliance costs this implies.See n. 3, above.

13. See Stern and Antholis (2007a, 183).

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age for nations to actually transfer the costs of noncompliance in an effort toaddress a global public good— something for which the trade regime allowsexemptions.

The potential disruptive element is that all nations do not recognize the pub-lic good in the same way, let alone the means to address it. Developing countries,which likely would be the targets of such a system, are almost certain to claimthat (1) this is a violation of the WTO’s rules against nondiscrimination, and(2) that it does not meet the standard for environmental exemption for thoserules. The “global public good standard,” developing countries would likelyargue, is not met because the current international climate treaty already embod-ies how the international community defines the climate challenge. That treaty,they will claim, explicitly demands that industrial nations act first, and that devel-oping countries are exempt from binding targets. Because the standing globalconsensus is that industrial nations must act first, any effort to use the traderegime to shift that burden would be seen as illegitimate.

So if industrial countries persist in imposing such tariffs in order to build amore effective climate regime, they might undermine the WTO— regardless ofwhich way the dispute settlement system determines the merits of the case. Ifa developing country claimed that this was a violation of WTO rules but lostthe dispute, the victory for industrial countries would come as an additionalblow to developing nations, on the heels of the WTO’s long- stalled Doha devel-opment round, which has failed to produce market openings to industrialmarkets. Conversely, a victory for developing countries might further under-mine public support for the WTO within industrial nations— which continuesto wane. Likewise, the effect on the climate regime could be enervating. Emerg-ing market players such as Brazil, China, and India will feel that they are beingforced into a climate agreement by being denied access to an international trad-ing regime that they have worked hard to enter as full participants. And industrialcountries might be less inclined to join the climate regime if border adjust-ments are found to be illegal vis- à- vis the WTO, because they will feel theircompetitiveness further eroded.

Avoiding this clash of global governance regimes should be a priority fornot only leading nations but also for the heads of both global regimes. It is per-haps the best argument for the world’s leading economies to not treat theseissues in isolation from one another, or from broader global economic devel-opments. Indeed, one of the ironies of the spread of democracy has been thatthose governments have to work so hard to accomplish domestic regulationand, as a result, are often the least inclined to take direction from internationalorganizations. The relatively fragile support for international regimes shouldnot be easily challenged— particularly in the name of establishing other regimes.


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When Can We Expect the New Climate Regime to Take Effect? Over a Generation

The idea of extending the enforcement of commitments over time gets at acentral element of any governance challenge. One of the great successes of thetrade regime was that it built itself gradually. Only after forty- five years of oper-ating did it lead to a treaty organization.

The long- term nature of the climate challenge means that solutions mustalso be long term. Today’s warmer climate is the result of GHG emissions accu-mulated over the last half century. Today’s emissions add to those historicconcentrations, and are already locking in warmer temperatures well past themiddle of this century. Little can be done now to stop that warming from hap-pening. So the effort to slow emissions over the next several decades will mostaffect temperature in the second half of this century.

What is the appropriate long- term goal? The starting point for all climatenegotiations, the 1992 Rio de Janeiro Treaty (ratified by the U.S. Senate, andadopted worldwide), included an abstract long- term goal: “stabilization ofgreenhouse gas concentrations in the atmosphere at a level that would preventdangerous anthropogenic interference with the climate system.” The Kyoto Pro-tocol was a practical attempt to implement Rio, yet it only set one target— a short- term reduction of GHG emissions by industrial nations. This was seenas a first step toward the longer- term goal. But because it lacked any second orthird step, it was widely criticized for not getting at the longer- term challenges.

As with the trade regime, the climate regime should keep this long- term focusthat was part of Rio’s plan and be geared around a portfolio of long- term targets— including concentration levels and global temperature change. Aswith any law or diplomatic agreement, those targets could be adjusted later asscientific and economic evidence is collected. But the key is to get some agree-ment on the long- term goals so that short- term steps can be seen in their broadercontext.

Right now, many scientists believe that dangerous interference with the cli-mate could be avoided if temperature increase is limited to 2˚C. Consensusestimates predict that doing so requires at least stabilizing GHG concentrationlevels at 550 parts per million by 2050.

If the E-8 or a major emitters’ group adopted 2˚C and 550 parts per millionas global goals— and urged other nations to do the same— countries could thentarget their short- term and long- term emissions cuts at levels that they felt tobe effective and fair steps toward that goal. When diplomats try to negotiateover relatively short- term emissions cuts, they would be better able to explainto their political leaders and publics how each short- term step contributes to a


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longer- term effort. (Indeed, in the recent proposed Lieberman- Warner climatelegislation, a series of emissions cuts are written in, extending out to 2050.) Asnations reach their shorter- term benchmarks, they could assess how they aredoing toward that longer- term goal. Among other things, this will help indus-trial countries signal to developing countries what they consider to be fairburden sharing for all nations over a future term, and that it is possible to achievethese marks without hurting economic growth.

Setting targets for temperature increase and gas concentrations can also helppoliticians, the media, and the public stay focused on the purpose of the under-taking: whether emission cuts are sufficient to slow and eventually stop globalwarming. Though scientists now overwhelmingly agree that human activitiesare leading to global warming, new evidence is coming in constantly. The con-sensus is being affirmed, but also challenged and updated on a nearly daily basis— mostly in the direction of sending more dire warning signals. Some sci-entists, for instance, now think that stabilization at 450 parts per million isneeded to prevent 2˚C of warming. Of greater concern, 2˚C of warming maynot be so safe. Recent research, for instance, finds that the current level of warm-ing is melting the Arctic ice cap faster than had been anticipated, potentiallyweakening the ice cap’s ability to reflect sunlight and cool the planet. If the icecap were to disappear with less than 2˚C of warming, it could be a tipping pointthat would lead to a more dramatic and dangerous shock to the Earth’s climate.

How Does the New Climate Regime Bring New Nations into the Agreement? It Must Provide a Path for Graduation

Perhaps the greatest lesson the climate regime can learn from the traderegime is something that the latter has failed, so far, to entirely address: howto bring the developing countries into the regime in a way that acknowledgestheir development challenge but also allows them to graduate to full responsi-bility as their economies grow. The trading regime is now in the midst of itslongest negotiating round in its sixty- year history— the so- called WTO Dohadevelopment round. One of the main reasons why it has been so difficult toconclude this round is that it is trying to address the regime’s core weakness:that the two basic groups of main players— the industrial countries and the devel-oping countries— have differing sets of obligations. The developing countriesenjoy “special and differential treatment,” which means that they are exemptfrom the more drastic tariff reductions taken by the industrial nations. Not onlyis the regime asymmetrical, but it is also unclear how any developing nationwould graduate to taking on an industrial- strength obligation, when the time


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was right. Thus, although the addition of these developing countries has beencritical to achieving global scope for the WTO, it also has added to the com-plexity of the process— and the current stalemate in negotiations.

As with the global trading system, the developing countries will ultimatelyneed to graduate and become part of the post–Kyoto Protocol climate system.Kyoto was problematic in several ways, but perhaps its biggest drawback wasthat the developing countries did not commit to cut their GHG emissions— infact, the treaty actually prevents them from taking a binding target even if theywant to do so. Argentina, for instance, tried to take on a binding target in 1998,but it was prevented from doing so by other developing countries.

It certainly makes sense for the developing countries to have different obli-gations, or obligations that kick in later, given the industrial world’s historicresponsibility and much greater wealth, along with the generational nature ofthe problem. But there is simply no way to solve the climate problem withoutthe active involvement of the developing countries— which, according to cur-rent projections, will account for more than 70 percent of GHG growth in next twenty- five years. Yet these countries show no willingness to accept Kyoto- style targets.

This catch-22 is not just a political problem; it is an economic one that goesto the heart of getting clean energy markets up and running. Most industrialcountries are now poised to take near- term and middle- term efforts to cut GHGemissions, which is already leading to some increased investment in cleanenergy. However, if the world economy is going to cut its carbon emissions byas much as 80 percent, enormous amounts of capital investment will be requiredto find transformative, carbon- free sources of energy. The more certain investorsfeel that the industrial countries will keep seeking ever deeper reductions inemissions, the more likely they will be to commit that kind of capital up front.The key is for the industrial countries to signal their long- term cuts. But theyare less likely to do so long as developing country action is not a sure thing.Right now, the developing countries are saying that they will not act, and theyare refusing to address the long- term challenge.

How can the international community break out of this box? The effort mustbegin with the industrial world, by responding realistically to developing coun-try concerns about equity. The developing countries rightfully feel that the richcountries are largely responsible for the problem to date, and probably for theglobal warming that will take place over the next fifty years. The industrialcountries should not dismiss these concerns, particularly because the develop-ing countries, particularly China and India, despite their recent economic gains,still have a nearly unfathomable number of their citizens living in extreme poverty— well over a billion people combined in those two countries alone. In


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addition to taking seriously efforts to estimate how much the industrial coun-tries have contributed to current GHG concentration levels, these nations shouldalso consider very- long- term targets on a per capita basis.

Second, the industrial countries should appeal to the developing countries’own self- interest. Climate change is most likely to hurt poor countries theworst, accentuating droughts and severe storms, for which these nations areleast prepared. Moreover, many of these countries are facing the local air pol-lution that comes in the early stages of industrialization, and the health carechallenges of clean air and water that could be lessened by early adoption ofclean energy technology. Moreover, investing in energy efficiency and cleanenergy is ultimately cost- effective.

One possible motive for joining a GARE would be the potential to earn emis-sions trading credits on a sizable scale. In the near term, this would meancontinuing to explore opportunities to earn emissions reduction credits on a project- by- project basis. This could potentially build support within the devel-oping countries for adopting country- wide emissions policies linked to theGARE.

And last, the industrial countries should not be shy about public diplomacyon climate change. Right now, the developing countries do not feel any publicpressure to respond to climate change— which is probably not surprising, giventhe development challenges many of them are facing. Thus, a public diplomacystrategy is needed that stresses each topic noted above— from equity to self- interest to the power of global markets to help transfer technology and capitalto developing countries. Of course, all these efforts require that the real firststeps be taken in the industrial world.

Conclusion

The political will has begun to develop in the United States and even in afew key developing countries for a global effort to reduce GHG emissions. Thispublic support, however, still remains far from the dramatic shift in consensusneeded to establish a full- blown global institution to address the climate chal-lenge. In addition to the costs associated with acting, a core concern is a familiarone in global governance: loss of sovereignty. There is some good reason forthis. Even for the most committed nations, the climate change challenge is ofsuch great economic and environmental complexity that few politicians arelikely to simply turn over the keys of their national policymaking to an inter-national treaty organization.


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In taking the first steps toward a global climate regime, the industrial nationscan learn from the experience of how the global trading regime built confidencein a self- regulating system. The GATT/WTO system built on a small group ofstates that, through a general agreement, were able to gear up domestic actionover a generation. The advantages of this approach are that it does not pose adirect challenge to national sovereignty. Instead, it coordinates the work of statesin a way that respects the diversity of local governance, and has a greater chanceof getting buy- in from the key players. The challenge of such an approach isthat it does not guarantee fast domestic action, that many smaller states willfeel left out of the process, and that the transition to the system may be diffi-cult for many participating states. Last, as with the trade regime, it mustovercome the biggest challenge for global governance in today’s world: howto graduate nations when they emerge from the development process into theindustrial world.


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References

Antholis, William, and Strobe Talbott. 2007. “Tackling Trade and Climate Change: Lead-ership on the Home Front of Foreign Policy.” In Opportunity 08, ed. Michael O’Hanlon.Brookings.

Bull, Hedley. 1977. The Anarchical Society. Columbia University Press.Kindleberger, Charles P. 1986. “International Public Goods without International Gov-

ernment.” American Economic Review 1, no. 76: 2–13.Purvis, Nigel. N.d. “Treat Climate Like Trade: The Case for Climate Protection Author-

ity.” Unpublished policy brief manuscript.Ruggie, John. 1983. “International Regimes, Transactions, and Change: Embedded Lib-

eralism in the Postwar Economic Order.” In International Regimes, ed. Stephen Krasner.Cornell University Press.

Stern, Todd, and William Antholis. 2007a. “A Changing Climate: The Road Ahead forthe United States.” Washington Quarterly, Winter 2007–8, 175–88.

———. 2007b. “Creating an E-8.” American Interest 2, no.3: 43–48.Wiener, Jonathan. 2007. “Incentives and Meta- Architecture.” In Architectures for Agree-

ment: Addressing Global Climate Change in a Post- Kyoto World, ed. Joseph Aldy andRobert Stavins. Cambridge University Press.


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The Climate Commons and a Global Environmental Organization

Over the period 2000 to 2008, the United States maintained a largely hos-tile posture toward multilateralism, ranging from military adventurism to

rejection of international norms for human rights and climate change. Its sup-port for the Doha Round of multilateral trade negotiations was undercut by afailure to live up to global commitments to foreign assistance (the MillenniumChallenge) and protectionist and retrograde 2008 agricultural legislation. If thisexperience shows America anything, it is that renouncing its role as a con-structive multilateral leader (dating to 1945) has been a disaster for its foreignpolicy and the esteem in which it is held.

This desultory period is now at an end, and a fresh start can be imagined inwhich U.S. leadership over multilateralism returns. One of the most pressingchallenges relates to global climate change and atmospheric carbon emissions.This issue is emblematic of environmental challenges that are transboundaryin nature, in which sovereign nations must coordinate effective interventionswith one another. These issues of global commons, of which the climate com-mons may be the most urgent, may provide an opportunity to push forward anagenda of institutional change. The specific change considered here is the cre-ation of a Global Environmental Organization (GEO), which can give authorityand responsibility to multilateral climate negotiations.

My argument is that the creation of new multilateral institutions respond-ing to global environmental challenges such as climate change is imperative.Fortunately, though these institutions would be new, their rationale and eventheir structure can be guided by experience with multilateral trade and com-mercial transactions, notably the World Trade Organization (WTO) and GeneralAgreement on Tariffs and Trade (GATT) system and the International LaborOrganization (ILO).1 Just as the GATT/WTO emerged from the postwar con-

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1. The present analysis relies on Runge (2001), and reminds one of the Oxford tutor who, com-menting on his student’s essay, noted: “Much of what you say is good and new; unfortunately,what is good is not new, and what is new is not good.” One hopes that while not new, the argu-ments here are still good.

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ferences as a rules- based response to global commercial interdependence, andan earlier ILO from global labor solidarity, so multilateral responses to envi-ronmental challenges reflect a growing recognition of nations’ ecologicalinterdependence, and a need for rules to coordinate their responses to theseglobal challenges.

This chapter is organized in five sections. First is a brief review of the trade- environment nexus and the rationale for global environmental rules over climatethat can coexist with trade regimes. Second is a specific proposal for a GEO,a major responsibility of which would be to coordinate nations’ responses toclimate change. Third is an appraisal of the implementation of a GEO. Fourthis special consideration of the role of developing countries. A final section offersconclusions.

The Trade- Environment Nexus

In the last two decades, strident criticisms have been leveled at multilateralinstitutions such as the WTO, describing them as faceless international bureau-cracies with programs harmful to the environment.2 Although hostile tomultilateral institutions, these criticisms raise the question: If not these insti-tutions, then what others? Though many criticisms of the global economy andglobal institutions may have merit, it is hard to think of a future in which tradeand global institutions, or issues of environment, will play little or no part.Accordingly, the task is to redefine objectives in a global economy, and torestructure institutions to meet these objectives, especially the urgent challengeof climate change.

The climate change debate has played out, like many other transboundaryenvironmental issues, as a multilateral negotiation over a protocol agreement,the Kyoto Protocol of the Framework Convention on Climate Change (UNFCC)adopted December 11, 1997, which entered into force in February 2005. As ofMay 2008, 182 parties had ratified the protocol, including 36 developed and137 developing countries (the United States is the only developed country notto have ratified it). Kyoto commits countries to reduce emissions of carbon diox-ide and five other greenhouse gases (GHGs) or to engage in emissions tradingto offset such commitments. Partly due to a failure of leadership by the UnitedStates, and partly due to exemptions written into the agreement for developingcountries, especially large GHG emitters such as China, the protocol has beenroundly criticized.


2. For a critique of the 1999 Seattle trade conference debacle in the context of food security,see Runge and Senauer (2000).

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This chapter argues that successful multilateral environmental agreementson climate change, as well as many other transboundary environmental issues,may require a framework at a higher level, the result of a meta- agreement onglobal environmental restructuring. Such restructuring is necessary today at aninternational level— much as, in the 1780s, the weaknesses of the Articles ofConfederation in the United States were increasingly apparent at the nationallevel. Then, Madison, Hamilton, and Jay (writing as “Publius” in The Feder-alist) recognized the need to persuade others that the nation would not endurewithout substantial institutional innovations. A central element in this schoolof thought was that free and unfettered commerce should be encouraged betweenstates, coordinated by bodies that derived their authority from the consent ofthese same states. The concept defended here has similar features, although thestates are nations and ecology as well as economy are at stake. The analogy tothe framing of the U.S. Constitution is important, because although a GEO mayinvolve ceding some limited national sovereignty over environmental stan-dards, its ultimate purpose is not to impose these standards from the top down.It is to provide greater institutional structure than currently available throughtreaties or individual multilateral agreements, as well as a nexus of scientificexpertise.

One of the reasons for a GEO, although far from the most compelling, isthat the GATT/WTO has been unable and largely unwilling to shoulder majorenvironmental responsibilities in conflicts between trade and the environment.This argument has been supported by developments inside the WTO. Its con-cern over the use of environmental measures as trade barriers has been stungby criticisms of various WTO rulings from environmentalists, notably the “tuna- dolphin” and “shrimp- turtle” cases. Concerned that it show some responseto environmental critics, the WTO General Council created a Committee onTrade and the Environment (CTE) in 1995. The CTE was set up to follow therecommendations of the Ministerial Decision on Trade and Environmentadopted in 1994 in Marrakech.3 Though defenders of the CTE claimed that itdemonstrated the “greening” of the WTO, it faced a barrage of criticism afterthe release of its heavily negotiated report to trade ministers in Singapore inDecember 1996.4 It had, critics argued, failed to recommend modifications inmultilateral trade rules “to enhance a positive interaction between trade andenvironmental measures.” It was precisely the unwillingness of trade ministers

C. Ford Runge 141

3. See Sampson (2000, 26–29). Shaffer (2001a) emphasizes that the motivation behind the CTEwas not simply pressure from groups concerned over the environmental impacts of trade but pri-marily fears by WTO members, especially developing countries, over the growing number ofenvironmental regulations with potential trade effects. From the point of view of trade ministers thelatter dominated the former. (All citations of pages in Shaffer 2001a are to the manuscript version.)

4. Charnovitz (1997).

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to redefine trade rules for environmental ends that revealed their essentially(and understandably) conservative posture.5 Sampson argued that the Singa-pore report of the CTE showed how wary trade officials were of entering intoenvironmental policy. This suggests that those who have the appropriate envi-ronmental expertise— both nationally and internationally— should play a largerrole. However, this begs the question of how they should play such a role. Sincethe mid-1990s, a growing number of experts have called for the creation of aGEO.

A Global Environmental Organization

The idea of a GEO is not new. With customary insight, George Kennan arguedas long ago as 1970 for the creation of an International Environmental Agencypossessing both “prestige and authority” to overcome hundreds of environ-mental entities, “all of them presenting a pattern too complicated even to beunderstood or borne in mind.”6 In the 1980s, the late Elliot Richardson arguedforcefully in the context of climate change for a permanent environmental mul-tilateral body, whether a “beefed- up UNEP” (United Nations EnvironmentProgram) or an entity patterned on the WTO.7

In the mid-1990s, both Esty and this author and colleagues proposed a GEO.8

The main rationale for its creation concerned transboundary environmental chal-lenges, often described as global public goods (or bads), such as climate change,atmospheric ozone pollution, degradation and loss of plant genetic resources,transboundary shipments of hazardous wastes, and threats to endangered ani-mal and plant species. Because they respect no national boundaries, theirsolution requires joint participation and coordination by sovereign states. Inthe absence of a “global Leviathan,” agreements must be reached that call uponeach affected country in the global commons to adopt policies that contributeto a general solution.9 As noted above, the mode adopted most has been a mul-tilateral environmental agreement (MEA), such as the Kyoto Protocol (1997),


5. Sampson (2000, 26–29). Shaffer (2001a, 1).6. Kennan (1970), quoted by Charnovitz (2002, 18).7. Richardson’s (1992) analysis and call for a Multilateral Environmental Agency was devel-

oped in the context of climate change, although the arguments he advanced are general ones. 8. Esty (1994); Runge, Orlalo- Magne, and Van de Kamp (1994)9. Other early advocates of a GEO were Steven Charnovitz and Jeffrey Dunoff, who suggested

modeling it on the International Labor Organization (ILO), as well as Geoffrey Palmer. SeeCharnovitz (1993); Dunoff (1994); Palmer (1992). See also Esty (1993). For more recent studies,see Whalley and Zissimos (2000) and Biermann (2000). Also see Kaul, Grunberg, and Stern(1999); Sandler (1997); Esty (1994); Runge, Orlalo- Magne, and Van de Kamp (1994).

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the Montreal Protocol (1989) on atmospheric ozone, and the Cartagena Proto-col (2000) on biosafety and plant genetic modification.

Though it is arguable that MEAs such as Kyoto are an adequate responseto these environmental problems, two fundamental questions arise.10 First,should the MEAs themselves somehow fall outside the trade disciplines of theGATT/WTO system, or (especially when they involve explicit trade measuresor sanctions) are they in fact in violation of the principles of free trade? Sec-ond, can the hundreds of existing MEAs, and the scores that can be anticipatedin the coming decades, including renegotiated agreements on carbon and cli-mate, be adequately managed without creating an institutional umbrella to helpoversee the linkages among and between them, and their potential conflictswith WTO rules?

In 2005, Biermann and Bauer collected papers by the growing number ofadvocates (and some critics) of a GEO in a single volume.11 First among theadvocates was Steven Charnovitz, who has long supported a GEO.12 It is impor-tant to emphasize that despite his intimate familiarity with the legal andeconomic details of both trade and environmental institutions, his overridingmessage is the role of a GEO in harnessing the political will to confront trans-boundary environmental issues, especially if they intersect with trade norms.

As the late Konrad von Moltke noted at the beginning of the decade: “therehas never been an occasion when the entire structure [of international envi-ronmental management] has been reviewed with a view to developing optimumarchitecture.”13 A United Nations Task Force observed that environmental activ-ities within the UN (not to mention outside it) frustrate government ministers,especially from developing countries, who do not have the staff to attend themultiplying number of meetings of the various bodies, task forces, and expertgroups.14 As Charnovitz noted, “If an organization chart of world environ-mental governance existed, its incoherence would be Exhibit A for reformers.”15

The basic design of a GEO advanced by Runge and colleagues was com-posed of a Secretariat and a Multilateral Commission on the Environment(MACE) (see figure 6-1).16 The inspiration for this structure was the NorthAmerican Commission for Environmental Cooperation, which had emergedfrom the environmental side agreement to the North American Free TradeAgreement (NAFTA). The GEO Secretariat would be a formal, ministerial-

C. Ford Runge 143

10. Runge (2009).11. Biermann and Bauer (2005).12. For example, see Charnovitz (2002).13. Von Moltke (2001, 15).14. UN Task Force on Environment and Human Settlements (1998).15. Charnovitz (2002, 17). 16. Runge, Orlalo- Magne, and Van de Kamp (1994).

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level body of government representatives, meeting periodically to affirm cer-tain policies. MACE would be a policy- oriented group of environmental expertsdrawn from nongovernmental organizations (NGOs), academia, business, andgovernment. Though the representatives to the GEO Secretariat would (like theWTO), be government officials, expert environmental and business involve-ment was also proposed, similar to the ILO. MACE would thus be composedof a standing group of environmental experts and government and business rep-resentatives from all member counties. Its meetings would be open to thepublic, and it would allow worldwide access to the data and analysis underly-ing its work. The primary focus of this work would be to propose ways to“harmonize up” national environmental standards, while carefully consideringthe technical issues and problems of this process for developing countries.MACE would issue regular reports and related documents proposing improvedpolicies, identifying environmental “hot spots,” and recommending specialprojects for national governments. This process would allow for public com-ments from any group, governmental or nongovernmental. The effect wouldbe to open MACE to full public participation and review.

In the context of climate change and renewed negotiations beyond the KyotoProtocol, a GEO would backstop and render assistance to the UNFCC, and


Figure 6-1. The Structure of a Global Environmental Organization

SECRETARIATGlobal Environment Organization

(GEO)

Nations as contracting parties

IBRDEBRDIDBIMF

WTO OECDUNEPUNDPGEF

Multilateral Commission on the Environment(MACE)

GEODispute settlement

procedure

Governmentrepresentatives

Businessrepresentatives

Environmentalrepresentatives

Othernongovernmentalrepresentatives

Source: Adapted from Runge, Ortalo-Magné, and Van de Kamp (1994).Note: IBRD = International Bank for Reconstruction and Development—that is, World Bank; EBRD = European for Reconstruction

and Development; IDB = Inter-American Development Bank; IMF = International Monetary Fund; WTO = World Trade Organization;OECD = Organization for Economic Cooperation and Development; UNEP = United Nations Environment Program; UNDP = UnitedNations Development Program; GEF = Global Environment Facility.

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offer technical assistance especially to developing countries entering into newagreements. It would also help to address potential conflicts between climateconventions and a variety of trade norms, such as the imposition of border taxadjustments to offset the effects of domestic GHG taxes.17

The GEO and MACE would work closely with the UNFCC and UNEP todevelop funding for environmental projects to upgrade national energy infra-structure, resulting in reduced GHG emissions. National governments wouldbe encouraged to establish an initial tranche of $10 billion for these purposesto operate on a revolving basis. This funding would focus primarily on GHG- reducing projects in those developing countries where national resources forenvironmental improvements are scarcest. The GEO would not supersede theUN agencies responsible for climate, but it would support them both politi-cally and technically. Eventually, UNEP might be incorporated into the GEO,as Charnovitz suggested, with the GEO styled as a specialized agency underArticle 59 of the UN charter, the same authority used to upgrade the UN Indus-trial Development Organization in 1985.18

The GEO would also work jointly with the WTO and the Organization forEconomic Cooperation and Development to identify trade measures thatthreaten environmental quality, and to develop environmental policies that areleast burdensome to trade expansion. It would serve as a general “chapeau” forthe growing number of multilateral environmental agreements, including theKyoto Protocol, just as the ILO serves as an umbrella over a large number ofspecial labor agreements and arrangements. Charnovitz proposed as a long- term objective the clustering, harmonization, and codification of many MEAsinto a codex of international environmental law, “in which treaties on the sametopic are grouped together, duplicative law eliminated, conflicting law recon-ciled, and eventually the hundreds of MEAs are reduced to a single code.”19

He also proposed that MEAs join this structure voluntarily, so as to avoid con-flicts with established governing bodies.20

Linking the environmental activities of a GEO to market access and tradereform in the WTO, the Organization for Economic Cooperation and Devel-opment, and the multilateral lending agencies would create additional incentivesfor developing countries to support it. Susskind and Ozawa noted that “envi-ronmental negotiations, up to now, have been conducted largely in isolationfrom negotiations on other international issues such as debt, trade, or security.”Linking these issues properly creates a larger negotiating space, and the poten-

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17. Frankel (2004).18. Charnovitz (2002, 20).19. Charnovitz (2002, 25).20. This is a problem emphasized by Juma (2000, 13), who argued against a GEO.

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tial for mutual gains, because “the goal of a well- structured negotiation is notto encourage compromise but to find ways of ensuring that all parties will bebetter off if they cooperate.”21 How such linkage occurs is important, and willbe considered in the sections below.

Although a highly elaborated plan will require a great deal of analysis andconsultation, it is well to ask whether such an organization is really needed,given UNEP and related work by development agencies such as the UnitedNations Development Program (UNDP) and the Commission on SustainableDevelopment, as well as hundreds of MEAs. Though supplementing and draw-ing on the work of these groups, knowledgeable observers and participants stillsupport a GEO.22

Precisely because an independent entity such as a GEO is lacking, a greatertemptation exists to use trade measures to enforce environmental obligations,harming the world trading system. Trade interests may condemn the use of suchmeasures for environmental goals (such as dolphin- safe tuna), but in the absenceof an overarching entity such as a GEO, environmentalists can more easily claimthat they have no recourse.

It is naive to imagine that trade and the environment can be entirely disjoint,but the creation of a GEO would assist in separating many issues that do notneed to be in conflict. The weaker the perceived ability of environmental groupsto influence international policies, the greater their incentive to use “linkage” destructively— to threaten the trading system in order to gain environmentalconcessions.23 By drawing environmental expertise and energy into the func-tioning of a GEO, the GATT/WTO system would largely be left to pursue itsown trade agenda, mindful of environmental concerns, and in cooperation witha GEO Secretariat, but not as a functioning “green” trading body.

Together, three arguments thus constitute the core rationale for a GEO: (1)the unwillingness and inappropriateness of the GATT/WTO system as a cen-ter for transnational environmental expertise and activity; (2) the widespreadnumber of environmental issues that are inherently multilateral due of theirscale and multiple jurisdictions, making them “global public goods” that can-not be adequately managed through existing agencies or ever- proliferating anduncoordinated MEAs; and (3) the logical necessity of separate institutionalauthority for what are substantively separate environmental problems, whichpose a set of targets for policy that require their own instruments at an inter-national level.


21. Susskind and Ozawa (1992, 153). See also Barrett (1992).22. For a discussion of the role of the UN agencies in global environmental affairs, see Thacher

(1992). A cautionary note on the need for new institutions in the context of NAFTA is given byMumme (1992). The range of supporters for a GEO has nonetheless continued to expand.

23. Hauer and Runge (1999).

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Implementation and Policy Constraints

There are important reasons why a GEO may be beyond the reach of theworld’s governments and their leaders. The first is that it will be opposed as unnecessary— that existing institutions, suitably augmented, are adequate torespond to transnational environmental challenges. The second is that it is unwieldy— another international bureaucracy that may prove just as unre-sponsive as existing ones to the concerns and interests of member states andmay actually challenge their sovereignty over national environmental issues.The third, and most potent, is that its creation would reflect the same “rich man’sclub” priorities— which, in the view of many developing countries, have dom-inated the GATT/WTO system, tilting its functioning toward priorities of theNorth rather than the South.

The first argument is that the panoply of existing UN agencies, NGOs, andMEAs together constitute a sufficient response to transboundary environmentalissues. These include UNEP, the UN Commission on Sustainable Development,and the hundreds of MEAs noted above. Others include the UNDP, the WorldBank, the World Meteorological Organization, and the Global EnvironmentalFacility. In addition, a growing number of NGOs— such as the World ResourcesInstitute in Washington, the World Wildlife Fund, and the Center for Interna-tional Environmental Law— have become active participants in thetrade/environment agenda. Juma notes that because of the diversity of environ-mental problems, specialized institutional responses are often required, reflectedin the MEAs and other agreements that deal with these questions issue by issue.Though coordination may be desirable, in his view, “centralization” is not.24

The second claim leveled at a GEO is that it is likely to be an unwieldy andunresponsive international bureaucracy of its own, which simply adds anotherlayer to the many and diverse responses to global environmental problems notedabove. Below the surface of this argument are GEO opponents that are relativelycomfortable with their influence over existing institutions, and that fear that theywould lose this influence in a new body. These groups include not just bureau-crats at bodies such as UNEP but also state agencies and NGOs. It is arguablethat member states of any multilateral body, along with stakeholders such asenvironmental NGOs, seek to capture it for their own purposes. Such invest-ments in capture, once made, are defended against new and uncertain prospects.25

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24. Juma (2000) asserts that Esty’s arguments in favor revolve around “administrative effi-ciency” claims. A careful reading of Esty (1994), and the arguments developed here suggests thatadministrative efficiency, even if improved by a GEO, is not a central argument in its favor, espe-cially in light of the struggles it would face from existing UN agencies.

25. See Shaffer (2001a, n. 27). Another analysis of the links from domestic political interestto trade and environment issues at the international level is given by Shaffer (2001b).

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A GEO that is less subject to capture, and therefore “unresponsive,” is also lesssubject to special interests. By increasing the scope for coordinated approachesto global environmental issues, a GEO may reduce opportunities for exercisingsuch influence, and thus arouse concerted opposition from defenders of the sta-tus quo.

A related issue concerns the many national agencies and ministries to whichexisting MEAs and agreements are tied back. At an administrative level, theauthority for various aspects of international environmental policymakingemanates from these different parts of national governments. In the UnitedStates, while the Executive Office of the President is ultimately responsible,duties for international environmental policy are parceled out across a largenumber of executive agencies, from the Environmental Protection Agency, tothe National Oceanic and Atmospheric Administration (part of the Departmentof Commerce), the State Department, the Department of Energy, the Office ofthe U.S. Trade Representative, and the Department of Agriculture, among oth-ers. Each agency will defend its role in status quo agreements against any“coordination” that diminishes it.

The third and most potent forces arrayed against a GEO are developing coun-tries that are convinced that it may force Northern priorities on Southerninterests. These include not only environmental goals regarded as lower prior-ities in developing countries but also trade protection in “green” disguise. AsJuma notes, “Many developing countries are concerned that a new environ-mental agency would only become another source of conditions andsanctions.”26 These concerns were amply revealed in the WTO’s CTE. In oppos-ing even the formation of the CTE, spokespeople for the Association ofSoutheast Asian Nations, such as Thailand, and other less- developed- countryrepresentatives from Morocco, Tanzania, and Egypt, all questioned the needfor it.27 Shaffer noted that none of them wanted “to be pressured into signingan environmental side agreement analogous to NAFTA’s.” When the CTEagenda was finally settled, it reflected a cluster of issues that linked less- developed- country environmental initiatives to the achievement of expandedaccess to Northern markets.28

However, even these concessions did little to assuage nervousness by devel-oping countries concerning the possible growth of environmental conditionality.Of particular concern was the widespread sense that environmental demandswould join similar demands by labor interests in the North to justify shuttingoff developing countries’ market access, a view reinforced by the political


26. Juma (2000, 15).27. Shaffer (2001a, 10).28. Shaffer (2001a, 14).

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alliances struck between greens and labor in opposition to trade liberalization.Discussing the idea of opening the Article XX exceptions to broaden allowancesfor environmental measures, for example, Brazil’s deputy permanent repre-sentative to the WTO stated in 1998 that “we [developing countries] cannot bein favor of a change in Article XX. We think that this would create an imbal-ance in terms of a whole set of disciplines and commitments and would set aprecedent for other issues.” As Shaffer notes, the other issues he had in mindwere trade restrictions based on “unfair” labor standards.29 It is particularlynoteworthy that Mexico, after acceding to the NAFTA environmental sideagreement with the United States and Canada, led the opposition to many U.S.proposals in the CTE. When the U.S. delegation questioned whether Mexico’srepresentatives to the CTE were speaking for the Mexican government, Mex-ico City quickly confirmed that these opposing views were indeed officialpositions.30

Together, these three claims pose serious challenges to successfully launch-ing a GEO. To recapitulate, they are, first, that existing bodies and agreementsrespecting international environmental issues are adequate, and do not requirea centralized overarching entity. Second is that a GEO would be unwieldy, sim-ply adding another layer of bureaucracy to existing agencies and groups, mostof which will oppose any attempts at coordination that diminishes their influ-ence. Third is that most developing countries will oppose any new body thatcould pressure them to conform to higher environmental norms or standardsor risk reduced access to Northern markets. Hence, any successful argumentin favor of a GEO must demonstrate that existing arrangements are not in factadequate and that coordination may not imply centralization; that a GEO canbe implemented in a way that accommodates and complements existing insti-tutional arrangements; and that less- developed countries’ suspicions andreservations can be overcome.

It is clear that the creation of a GEO would pose difficult issues of imple-mentation. Among them are: (1) What duties of existing bodies would beassumed by a GEO, and what would these bodies then do? For example, theGEO should add value to the IPCC by offering scientific and policy advice anddirection on climate change, without trampling on the IPCC’s role. (2) Whatnew responsibilities would be assigned to a GEO by its members, and by whomwould these duties be performed? If the GEO is as lightly staffed as the WTOSecretariat, for example, how can it manage to draw on university research onclimate change that can be brought to bear on negotiations? (3) What would

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29. Shaffer (2001a, 21).30. Interview with Ricardo Barba, deputy permanent representative to the WTO from Mexico,

quoted in Shaffer (2001a, 26).

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be the relationship between a GEO and the WTO? Would consultations betweenthe two be informal or formalized? Though no definitive answers can be givento these complex legal and administrative questions in a brief treatment, somegeneral comments are in order.

First, it is probable that a GEO would eventually assume some of the respon-sibilities of UNEP and the Commission on Sustainable Development (CSD).This is in part, Esty argues, because UNEP as an agency tries to do too much.The CSD is similarly overstretched. In addition, there are responsibilities ofthe UNDP and the World Bank related to environment and development in whichthe GEO might assist, assuming that development projects remained theprovince of these groups. The GEO could, for example, assist in the planningof expanded irrigation schemes involving interbasin and/or international trans-fers of water so as to minimize environmental disruptions. A major function ofthe GEO would be to provide a transparent source of information on globalenvironmental issues, assisting what is now often the task of NGOs. Esty notesthat someone attempting to track environmental decisions at the WTO “wouldfind out a great deal more by reading newsletters from the World Wildlife Fundthen communiqués from the Office of the U.S. Trade Representative.”31

Although groups such as UNEP and even some NGOs might feel threatenedby a GEO, it is probable that enough work will remain to keep every groupfully engaged in international environmental affairs. However, to the extent thatbudgetary resources are drawn off existing agencies and programs to supporta GEO, internecine competition will be intense. This is why the proposed $10billion infusion is necessary, which should be linked to resources drawn fromthe World Bank’s Climate Investment Fund.

As noted above, a GEO would offer a “chapeau” for the growing numberof MEAs, especially in the context of dispute settlement, and in coordinatingthe MEAs. An analogy is the role played (since 1967) by the World Intellec-tual Property Organization (WIPO), headquartered in Geneva. The WIPO wasestablished in part to help unsnarl the “treaty congestion” that surrounded intel-lectual property and patent rights, and to help rationalize and coordinate theseefforts.32

It is also arguable that a GEO would help to offset the perception in devel-oping countries that MEAs and exceptions granted to WTO contracting partiesunder GATT Article XX or other headings are heavily tilted in the direction ofthe Northern states. The Indian NGO Centre for Science and the Environment,


31. Esty (1999, 1564). Indeed, the total budget resources devoted to these efforts by NGOsconsiderably exceed those of subagencies of UNEP responsible for environmental information.Shaffer (2001a, 32 n. 97) notes that Greenpeace’s annual income in 1998 was $125 million, andthat of the World Wildlife Fund was $53 million.

32. See Esty (1994, 96).

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for example, “characterized the use of trade measures in MEAs as an inequitablelever available only to stronger countries.”33 As noted above, so long as thisperception continues, Southern countries will remain skeptical of global envi-ronmental initiatives. Yet a GEO may be precisely the mechanism needed togive added weight to these Southern concerns.

One of the most pressing and unmet needs to which a GEO could contributeis preparation and technical support available to developing countries in theformulation of development and environmental initiatives. If a GEO is to suc-ceed, it must treat these needs as of paramount importance. In particular, a GEOshould take as its responsibility the implementation of the primary principlesemerging from the 1992 Rio de Janeiro Declaration on Environment and Devel-opment (ostensibly the current responsibility of the CSD):

—that developing and developed countries have differing responsibilities toenact domestic measures to protect the environment;

—that international transfers are necessary to assist developing countries toupgrade their environmental protection measures;

—that unilateral measures are to be avoided.34

In the context of a GEO, these three principles imply that a form of “specialand differential treatment” in environmental policies should be part of an inter-national body of multilateral environmental rules, in which the differingcapacities of the North and South to mount programs of environmental protec-tion are realistically acknowledged. The resources to undertake environmentalprograms are substantial, and it is unreasonable to expect countries at early stagesof development to give them priority. Just as unilateralism in trade policy isultimately self- defeating, so it is where transborder environmental issues areconcerned. A GEO would not require all national environmental measures tobe subjected to oversight, but where these measures affect the “global com-mons,” multilateralism should provide a foundational principle. Finally, theGEO/WTO interface will be all- important. Perhaps, paradoxically, if it is totake environmental pressures off the WTO, a GEO should be located in Geneva.There, it could assist the WTO (analogous, again, to WIPO), and it would besituated to work in cooperation with the World Health Organization and thegrowing number of environmental NGOs that have found it useful to use Genevaas a base.

A last set of implementation issues concerns timing and phasing. It is veryunlikely, given the problems and potential opposition facing a GEO, that it could

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33. Quoted by Shaffer (2001a, 36). Biermann (2000, 25–26) argues that improving technol-ogy transfers to developing countries for environmental improvements could be a major GEOfunction.

34. Quoted by Shaffer (2001a, 47 n. 132).

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be implemented in a single “grand stroke,” nor should climate change negoti-ations be delayed while waiting for the GEO to be set up, which could occuras a parallel and reinforcing process. Achieving new climate rules, however,will be more likely to emerge from a more general agreement to reform andrevitalize all the major environmental institutions in a single exercise analo-gous to the momentous postwar conferences of the 1940s. Another possibilitywould be to launch a GEO as part of a refreshed multilateral trade negotiation(MTN) after the WTO Doha Round. Such an outcome assumes that such a roundcan be successfully negotiated by a new U.S. administration, with side nego-tiations on a GEO contributing part of the final package. A third approach wouldbe to open negations on a GEO as a multilateral environmental effort, linkedto, but separate from, MTNs. This would follow, in general form, the NAFTAside agreement model and would place GEO talks on a separate path. A dif-ference might be that whereas the NAFTA environmental side agreement wouldsurely not have succeeded had NAFTA failed, GEO talks might proceed andeven succeed without a successful MTN. However, for a variety of reasons,related especially to the market access requirements of developing countries,this outcome seems unlikely.35

Sampson advocated the use of an “eminent persons group,” for global envi-ronment issues on the model of the Leutwiler Group in the run- up to theUruguay Round.36 Such a group might demarcate subnegotiating groups sim-ilar to the Uruguay Round to take up issues such as MEAs, climate changespecifically, and exceptions to trade agreements for environmental measuresunder Article XX.37


35. Shaffer (2001a, nn. 110, 111) discusses the five NGO Symposia held by the WTO. SeeRicupero (1998).

36. Sampson (2000).37. Biermann (2000) offers three “models” for a GEO: a cooperation model, a centralization

model, and a hierarchization model. The cooperation model would essentially retain all existingbodies in their current state but would elevate UNEP to a leading and coordinating role, becom-ing in effect a GEO. The centralization model would grant greater authority to a central institutionalactor (again, probably UNEP) to oversee and direct the environmental activities of other UN bod-ies. This model would make the GEO similar to the WTO, and would bring MEAs into a reportingrelationship with the GEO. This GEO would have a double- weighted voting procedure, in whichdecisions would require a two- thirds majority of both developed and developing countries. Thehierarchization model would grant the GEO enforcement authority like the Security Council, andwould constitute the most dirigiste of the alternatives— approaching a global government. Of thethree alternatives, a hybrid of the first two, “cooperation” and “centralization,” is closest in spiritto that discussed here. One might call this hybrid the “coordination model.”

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The Role of Developing Countries

Considerable attention has already been given to the role and interests ofdeveloping countries in successfully negotiating a GEO. As a group, the devel-oping countries felt left out of the many rewards promised in return for theirsupport of a Uruguay Round Agreement and sought relief in the now nearlymoribund Doha Round. They are equally skeptical of making new commit-ments to global carbon and climate agreements. Since the completion of theUruguay Round, global trade has risen significantly faster than gross domes-tic product (GDP), but the share of developing country exports has fallenrelative to that of the United States and European Union. However, if climatecommitments are tied to expanded market access to the North, the developingcountries may show renewed interest in both trade liberalization and environ-mental protection. Brazil made market access in agriculture a precondition forthe success of the Doha Round. India argued that the commitments it made onintellectual property rights in the Uruguay Round have not been matched bythe expanded market access in agriculture and textiles that it expected to ensue.38

Market access for developing countries probably offers the only prize suffi-cient to induce these countries to take a GEO and climate and carboncommitments seriously, and would undercut the suspicion that a GEO is a pro-tectionist Trojan Horse, while underscoring economic growth as providing thewherewithal to make the investments required to protect their environments.

A last, and especially thorny, issue concerns the potential role of a GEO asan imposer of sanctions and conditionality on countries unwilling or unable tocomply with norms or standards, such as global climate- induced reductions inair pollution. Sanctions are an old and contentious issue in trade policy.39 Mostmultilateral agreements, including a renegotiated climate agreement, must carrypenalties for noncompliance. However, there is no reason why such penaltiesneed to take the form of trade sanctions, as opposed to fines, denial of votingrights, or other measures decoupled from trade itself. This argument can beemployed in order to separate environment from trade measures, reducing thepotential use (and abuse) of trade sanctions to enforce multilateral environmentalcompliance.

The experience of sanctions in trade policy suggests that they are far lessimportant to the maintenance of world trade rules than the dispute settlement

C. Ford Runge 153

38. See Finger and Schaler (2000); Ricupero (2000).39. See Hudec (1993). In the case of environmental obligations and sanctions, see Barrett (2003).

In a theoretical article, Barrett (1997) argues that the existence of trade sanctions in environmen-tal agreements may nudge countries toward compliance, so long as a sufficient number of countriesare committed to their enforcement.

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mechanisms of the WTO, which are in turn modeled on those established in1919 by the ILO.40 If a GEO were to come into being, the opportunity to cre-ate a separate environmental dispute resolution process relating especially tocarbon and climate might be of special importance. Such a process would alsoallow NGOs to enter disputes as “friends of the court.” Though not a formalsanction, NGOs’ capacity to focus international attention on countries foundto have violated global norms on climate and carbon could have important effectson compliance.

Conclusions

Despite the necessary limits of this analysis, a number of conclusions emerge.The first is that a GEO could help to frame and promote new negotiations oncarbon and climate, promoting changes in both the trading system and the globalenvironment. To the trading system, it offers the opportunity to disentangle tradefrom environmental matters, allowing the WTO to focus where it should: onthe expansion of market access and reductions in trade protectionism, savingattention for climate measures only in cases of obvious trade distortion. A GEOcould be of considerable assistance to the WTO in clarifying where environ-mental exceptions to the GATT articles were justified (under Article XX orother headings) in cases affecting carbon and climate, and providing guide-lines for minimally trade- distorting MEAs beyond a renewed Kyoto Protocol.At the same time, a GEO could help fill the institutional gap in dispute reso-lution and coordination surrounding the many MEAs and institutions nowresponsible for global environmental issues, such as the UNFCC. This coor-dination need not imply centralization, nor the usurpation of authority fromthese bodies or national governments.

Second, a GEO could channel needed attention to a wide range of globalpublic goods and global commons issues— notably climate change, but alsoozone depletion, biodiversity and overfishing. These issues are in need ofgreater focus and attention independent of the trading system, suggesting a needfor separate multilateral instruments such as a GEO.

Third, overcoming opposition to a GEO will require a twofold undertakingthat involves the politics and postures of both developed and developing coun-tries. In the North, opposition to multilateral institutions generally— arising fromboth the right and the left— must change. Conservatives will need to overcome


40. Steven Charnovitz, personal communication, January 10, 2001. See Charnovitz (2000). Forreviews of different types of carrots and sticks, see Esty (1994, appendix) and Chang (1997). Fora broader assessment of compliance issues, see Chayes and Chayes (1995).

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their distrust of global environmental initiatives. The environmental left, mean-while, must overcome its strident opposition to all things multinational. Indeveloping countries, climate change commitments can now be deflected byclaims that such issues are rich countries’ problems. Unless a GEO clearly offersspecific commitments to special and differential treatment for developing coun-tries, expanded technical assistance, and ample representation, it will be easilydiscredited as a form of environmental conditionality and a disguised mecha-nism of Northern influence.

Fourth, it is unlikely that developing countries will find a GEO attractiveunless it is linked to commitments for expanded market access, especially inkey areas such as agriculture and textiles. This suggests a model in which aGEO is linked to but separate from trade negotiations. The virtue of linkage isthat developing countries will see that market access will enable them seriouslyto contemplate environmental improvements in the context of economic growth.The virtue of separation is that a successful MTN will not have to internalizequestions of multilateral environmental policy.

The overall conclusion is that despite serious hurdles, a GEO can be envi-sioned that is both protrade and proenvironment, strengthening commitmentsto carbon reduction and climate, while carving out new areas of internationalenvironmental competency. Achieving this vision will be difficult, but it is thisauthor’s view that we are condemned to succeed.

C. Ford Runge 155

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Comments

Comment by Colin I. Bradford Jr.

Both chapters 5 and 6 are of great interest and relevance to the issues in thisvolume, and both make excellent arguments and raise issues in a stimulatingfashion. In the name of effectiveness, both chapters raise concerns about thedangers of having too many countries involved in specific issues and raisingtoo many issues in a single forum.

Energy as the Door into Climate Change

With due deference to all those— including Ford Runge, in chapter 6—whomake a good case for a Global Environmental Organization (GEO), with whomI am sympathetic, my view would be that for the purposes of negotiating a cli-mate change framework for the post–Kyoto Protocol period, it would be betterto begin with a focus on the energy- climate change link and to approach theissues of global climate change through energy rather than through the envi-ronment, given all its multiple meanings and dimensions. Approaching globalclimate change through energy would have a greater chance of engaging lead-ers from energy companies, banks, investment firms, technology companies,and other private sector leaders, who ultimately bear the responsibility formeeting the energy supply challenges facing the globe over the next fifty years,as world population will increase by nearly 3 billion people.

I think a case can be made that “the environment” needs a GEO, just as tradehas the World Trade Organization (WTO), health has the World Health Organ-ization, finance has the International Monetary Fund, and development has theWorld Bank. “The environment” is immensely broad in its scope and involvesan enormous number of issues, which would benefit from an integrated approachand a single focal point to enable the world community to work effectively on

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these issues. But negotiating an energy– climate change framework requires amore flexible and agile mechanism, such as that developed in chapter 5 byWilliam Antholis, more than it needs a new, permanent umbrella agency to moveon this specific issue over the next few years. A new formal organization is morethe work of a generation, as Antholis points out, than it is a solution to our cur-rent challenges. I will return to this point at the end of this comment.

Governance Parallels between Trade and Climate Change

Chapter 5 gives an excellent synoptic summary of the parallels between theevolution of the international institutional arrangements for trade and those forglobal climate change. The story is insightful and useful for providing a path-way for evolutionary institutional change. The similarity between the universalmembership forums for the discussion of trade and climate change (the UnitedNations Conference on Trade and Development, and the United Nations Frame-work Convention on Climate Change), the intermediate steering groups (theQuad, or Group of Eight, G-8; and the Major Emitters’ Group, E-8, or Groupof Thirteen), and the global governance institutions (the WTO, and, eventually,a GEO) sets a relevant and practical backdrop for the current governance issuesrelated to climate change. This backdrop provides the sense that progress isindeed possible based not only on hope but also on experience.

Governance Parallels between Summit Reform and Climate Change

With our Canadian colleagues at the Centre for International GovernanceInnovation in Waterloo and the Centre for Global Studies in Victoria, we atBrookings have been working for the past four years to try to advance summitreform. The crux of this work fits the pattern laid out in chapter 5. The centralissue is how to find an intermediate global steering group that is between theuniversal membership of the United Nations and a group, in this case the G-8,that is too small to be representative of the global community as currently con-stituted and emerging in the future. This collective effort has concluded, aftersurveying a number of global challenges, that energy security and climatechange together have the greatest leverage to compel summit reform andbroaden the group of countries included in the annual meetings of heads ofstate that seek to address global issues. As a result, we ended up in the sameplace as Antholis, but by a different route. We have concluded that a summitgrouping composed of at least the G-8 plus five emerging market economies

Comments on Chapters 5 and 6 157

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(China, India, Brazil, South Africa, and Mexico), and possibly a slightly largergrouping, would provide significantly greater representative legitimacy thanthe G-8 alone and still be small enough to be able to reach closure, make effec-tive decisions, and thoroughly discuss the issues. Thus, it would be both effectiveand legitimate, not one without the other.

Small Size an Issue for Efficiency, but Not for Representativeness Legitimacy

Therefore, though there is convergence between the summit reform effortssketched above and the governance group proposed by Antholis, there are somecaveats. I think it is fair to say that Antholis is more concerned about efficiencythan legitimacy, and about effectiveness than representativeness, though heclearly is concerned about both. His concern is understandable. It is also a strongundercurrent in the summit reform debate. Many observers are concerned thata leaders’-level Group of Twenty (L-20), parallel to the finance ministers’ G-20,would be too large, even though most finance ministry officials with whom wehave talked find that the G-20 finance ministers’ group works extremely well.In part, because of these concerns, the consensus in our discussions over thelast several years has dropped back from advocacy of an L-20, originally pro-posed by the former Canadian prime minister, Paul Martin, to something largerthan the G-13 implied by the current practice of partial summit meetings of theG-8 plus 5.

It is important to be aware that the E-8 described by Antholis is in reality agroup larger than eight. The E-8 is composed of the United States, the Euro-pean Union, Japan, Russia, China, India, Brazil, and South Africa. Realistically,in the near term, the Europeans, very regrettably, are not yet ready to have them-selves represented at summits or in any of the major international institutionsby a single EU representative. So Antholis’s E-8 becomes an E-11 by seatingFrance, Germany, Italy, and the United Kingdom, instead of just the EU. TheE-8 (= E-11) also leaves out Canada and Mexico from the G-8-plus-5 group;adding them back, as it were, into a mix that many would consider the currentconsensus, brings the E-8 to an E-13. Then there is the issue that Australia,Indonesia, and South Korea, in addition to the thirteen, are also among the six-teen in the major emitters’ group, which would bring the energy–climate changenegotiating group to sixteen, not eight. Give or take a few, this is more likelyto be the size of the group that can be both more effective and more legitimate,on this issue and perhaps on others, than a smaller group. One way to say it isthat an E-16 would be better than an E-8, not just bigger.


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This result is in accord with a recent survey I undertook for a chapter on theUnited States and summit reform for a forthcoming book from the Centre forInternational Governance Innovation.1 Seventy- six people responded to a ques-tionnaire with more than fifteen questions in early 2008. Thirty of therespondents were officials from sixteen G-20 countries, either in Washingtonor other capitals, and forty- six were experts (academics, researchers, think tankscholars) from the sixteen countries. Of the seventy- six, twenty- six were fromthe United States (mostly experts), and fifty were from the other fifteen coun-tries (most of the G-8 plus 5, along with Australia, Argentina, South Korea,and Turkey). On the issue of summit size, between 90 and 100 percent of boththose from the United States and from other major countries viewed “the recentevolution of the G-8 into a meeting of leaders from G-8 industrial countriesplus 5 ‘outreach’ countries” as important, positive, and necessary, but fewerthan 25 percent of both groups found it to be adequate. When asked “Wouldyou favor other changes in the leaders- level summit, beyond thirteen?” 79 per-cent of the U.S. respondents and 85 percent of the respondents from the fifteenother major countries concurred.2

Between Intermediate Group and Formal Organization

Another cautionary note I would strike is to raise the question of whethernew international institutional arrangements would be needed to guide themajor countries through the energy– climate change issues over time. The globalenergy summit in Jidda in June 2008 revealed the fissure in the internationalcommunity between energy- producing and energy- consuming nations. It alsoreinforced the fact that the oil producers meet under the aegis of the Organi-zation of the Petroleum Exporting Countries and the oil- consuming countriesmeet under the aegis of the International Energy Agency at the Organizationfor Economic Cooperation and Development (OECD). Yet there is no globalfocal point for oil or for energy in general, which includes all the major play-ers in the global energy market. Most of the big private and public sector actorsseem to prefer this fractured, fragmented, uncoordinated system to anythingmore organized because they are big and thus have first- mover advantages, profitfrom information gaps, and want to strike deals without having to put all theircards on the table.

There is a long distance between a summit grouping and a formal “treatyorganization,” as Antholis calls WTO /GEO- type institutions. The question is


1. Bradford (2008).2. See Bradford (2008).

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whether the issues of energy and climate change would not benefit over thelong run from a small secretariat that would present questions for private andpublic leaders to discuss, especially those related to long- term energy supply,rather than leaving these lumpy, risky investments with long gestation periodsto the haphazard opportunities that present themselves to different actors at dif-ferent moments in different geographical areas. There is a global energy markettoday, but there is no focal point for energy in the global landscape. And thoughthere is no single silver bullet of governance innovation for global energy, oneidea would be to build on the OECD’s assets to create a Global Energy Coun-cil, which is elaborated elsewhere.3

Comment by Daniel W. Drezner

As someone who knows more about international trade policy than the envi-ronment, it is difficult to read chapter 5 by William Antholis and chapter 6 byC. Ford Runge without a rueful smile. No doubt, the global institutional machin-ery for dealing with trade seems to rest on a stronger foundation than that fordealing with global warming. Nevertheless, as I write this in the middle of 2008,the political trend lines on the two issues are moving in opposite directions,both globally and in the United States. The public consensus on the causes andoutcomes of global warming has never been greater.1 Both major party nomi-nees for the presidency in the United States pledged to create a cap- and- tradesystem for reducing emissions of carbon dioxide and other greenhouse gases.The congressional wrangling over the Warner- Lieberman Bill, though frus-trating, revealed a majority in favor of some action on the issue. In contrast,the bipartisan consensus on trade liberalization is now officially dead.2 In thespring of 2008, the Democratic Party candidates for president squabbled overwho disliked the North American Free Trade Agreement more. The Doha Roundof multilateral trade negotiations has stalled out. The bilateral free trade agree-ments with South Korea, Colombia, and Panama are unlikely to be ratified.Environmentalists should be wary of copying the trade regime, if these are thepolitical results!

I applaud both Runge and Antholis for crafting arguments that are fully cog-nizant of the domestic political realities with respect to environmental protection.Antholis’s suggestion to ratify environmental accords as congressional- executiveagreements rather than as treaties is a productive step forward. I certainly admire


3. See Bradford (2007).1. Evans and Steven (2007). 2. Drezner (2006).

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both authors’ optimism in the face of such political realities. I am less convinced,however, that these two chapters grasp all the sources of international cooper-ation that led to the current trade regime. Both chapters postulate that the originsstory of the General Agreement on Tariffs and Trade / World Trade Organiza-tion (GATT/WTO) system can be replicated in the environmental realm. Thiskind of analogical reasoning can be prone to error, however. Runge and Antho-lis fail to recognize how 1940s trade politics differs from twenty- first- centuryenvironmental politics. The distribution of power, the calculation of interest, andthe institutional framework are all different— and on each dimension, the cur-rent situation reduces the likelihood of creating a Global EnvironmentalOrganization (GEO) or a General Agreement to Reduce Emissions (GARE).

Both Antholis and Runge discuss the creation of the GATT regime from aninternational legal perspective— that is, it was a negotiation among sovereignstates that existed as equals on the global stage. Their discussions are not inac-curate, but they do omit the crucial role that the distribution of power playedin the creation of the GATT. The United States was the unparalleled hegemonin the late 1940s, responsible for close to half of the world’s output. After WorldWar II, the United States was bound and determined to foster an internationaleconomic order that would prevent the closure of the 1930s. This included atrading system to ensure that all participating members received nondiscrimi-natory treatment in traded goods.

This combination of power and interest on the part of the hegemon guaran-teed that the GATT would be created. To reassure nervous allies, the UnitedStates was willing to “bind” itself to the GATT, demonstrating that the rules ofthe game would be respected.3 The United States also grandfathered in theBritish imperial system, ensuring that the most important “follower” state waswilling to cooperate. In both cases, American primacy was so great that Wash-ington was willing to incur short- term costs for long- term gain. As hegemonicstability theory suggests, the United States also provided the lion’s share ofglobal public goods— the reserve currency, a security umbrella, foreign aid transfers— that kept the system functioning.4

The current situation looks rather different. The United States remains themost powerful country in the world, but outside the military sphere it is merelythe first among equals. China has supplanted America as the biggest emitter ofgreenhouse gases. From an economic perspective, we are witnessing a transi-tion from a bipolar world (the United States plus the European Union) to amultipolar world (the members of the Organization for Economic Cooperationand Development plus Brazil, Russia, India, and China, known as the BRICs).


3. Ikenberry (2000). 4. Frieden (2006).

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International relations theory is not sanguine about what this means for inter-national cooperation. In theory, a concert of great powers can still fostercooperation.5 Possible does not mean likely, however.6 In practice, as the num-ber of powerful actors increases, the likelihood of meaningful cooperationdeclines.7 The unending Doha Round of multilateral trade negotiations is obvi-ous evidence of this. The current distribution of power does not make the creationof a GEO or GARE impossible— but it does make it much more difficult.

The constellation of state interests on global warming is also different fromtrade. The GATT framework thrived because this noncommunist institutioncould simply bypass the Soviet bloc. At the outset, only like- minded states par-ticipated in the GATT system. Over time, what started out as an exclusive clubtransformed itself into a universalmembership institution.

This growth pattern worked for two reasons. First, nondiscriminatory traderules are not a perfect public good; they are at least partially excludable. Ifstates did not wish to join the GATT system, then the GATT’s members wereunder no obligation to bestow most- favored- nation trading status upon them.Access to the dispute settlement mechanism was also blocked. The GATT’smember states had the option of erecting higher trade barriers against non-members. Because trade liberalization contributed to greater economic growth(through trade creation) as well as the relative reduction of trade between mem-bers and nonmembers (through trade diversion), the opportunity costs ofnoncooperation were manifestly clear. In this manner, the members of the Quad(the United States, Japan, Canada, and Europe) were able to create a “club stan-dard” on trade— in which other countries had little choice but to join.8

Although trade might generate partially excludable benefits, the mitigationof climate change is essentially a pure public good. With this kind of publicgood, each country is best off when it can free ride off every other country’scostly steps to reduce carbon emissions.9 Global warming represents a classictragedy of the commons / n- person prisoner’s dilemma problem in internationalrelations. To be sure, mutual cooperation is better than mutual defection, butunilateral defection is the best of both worlds. This incentive structure requiresthe creation of a different mix of incentives and punishments to ensure effec-tive cooperation.

International relations theory suggests two mechanisms to ensure coopera-tion: the logic of appropriateness, and the logic of consequences.10 The former


5. Snidal (1985).6. Axelrod and Keohane (1985). 7. Krasner (1976).8. Drezner (2007a); see also Gruber (2000). 9. Barrett (2007).10. March and Olsen (1998).

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relies on legal or normative obligation to deter noncooperation. Defecting statesare viewed as violating a commonly accepted norm. Certainly, the normativepressure to “do something” about global warming has been on the increase.The problem is that developing countries— which must participate for mitiga-tion to be appreciable— can deploy a counternorm of fairness. They can arguethat because the economies belonging to the Organization for Economic Coop-eration and Development were historically responsible for the bulk of carbondioxide emissions, they should be responsible for shouldering the burden ofameliorating the problem. With competing norms at play, it is unlikely that alogic of appropriateness will work on its own.

The logic of consequences involves the creation of material rewards and pun-ishments to encourage more compliance. As the other chapters in this volumesuggest, however, the utility of trade sanctions or border taxes in punishingnoncompliance is problematic from either a legal or a welfare perspective. Thisleaves the creation of excludable incentives for nations that choose to join aGARE, a GEO, or an emitters’ grouping.

This leads to a mildly perverse suggestion. Because the effects of mitiga-tion cannot be excluded, any new club should create an excludable benefit thatreduces the adaptation costs with respect to global warming. The expert con-sensus on global warming is that regardless of what is done to mitigate its effects,adaptation to elevated levels of greenhouse gases will be required. Furthermore,this burden will fall disproportionately on the developing world. If a GARE ora GEO proffers an adaptation fund of some sort, it could encourage the neces-sary levels of cooperation.

Perhaps the biggest difference between the GATT’s origins and the attemptto develop a parallel environmental organization is the existing institutionalenvironment. The GATT was created in an institutional vacuum— there wereno other significant trade institutions in existence in 1947. As John Ikenberryhas observed, the principal efforts to craft “constitutional orders” have followedmajor power wars.11 These wars discredited the legitimacy of the old order andgenerated decisive shifts in the global distribution of power. This allowed themilitary victors to write the rules, once the slate was wiped clean of preexist-ing institutions. At present, however, the slate is not even close to clean. Therehas clearly been a steady increase in the number of conventional intergovern-mental organizations, autonomous conferences, and multilateral treaties— evenin the environmental realm.12

What will be the effect of adding a GEO or a GARE to this unclean slate?Liberal internationalists believe this trend to be a good thing. The editors of


11. Ikenberry (2000).12. Drezner (2008).

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Legalization and World Politics observe approvingly that “in general, greaterinstitutionalization implies that institutional rules govern more of the behav-ior of important actors— more in the sense that behavior previously outside thescope of particular rules is now within that scope or that behavior that was pre-viously regulated is now more deeply regulated.”13 In their chapters, bothAntholis and Runge express the belief that the new organizations they conjureinto existence will act to coordinate the existing morass of environmental insti-tutions.

As international regimes proliferate, overlap, and impinge upon each other,there are several reasons to believe that the whole might be less than the sumof the parts. Institutional proliferation allows states to engage in strategic forumshopping. This can be seen in the trade realm, where the explosion of free tradeagreements has weakened the GATT/WTO regime.14 The existence of nestedand overlapping governance arrangements makes it more difficult to detectopportunistic defections from existing regimes. The creation of legal mandatesthat conflict over time can weaken all actors’ sense of legal obligation.

Given the sharp distributional implications of global warming, the creationof new environmental organizations— particularly a GEO— risks the creationof “sham governance.” Governments will agree to a notional set of global reg-ulations with weak or nonexistent monitoring or enforcement schemes. Shamgovernance is politically useful to states of all stripes, because it permits gov-ernments to claim the de jure existence of cooperation, even in the absence ofeffective de facto enforcement. Thus, a GEO could act to relieve or redirectany domestic or civil society pressure for significant global regulations. And itcould also create path dependencies in governance institutions that would casta shadow over future governance efforts.15

An alternative possibility is to reform existing institutions to incorporateglobal warming as an issue area. Ideally, the way to do this, as Antholis hintsin chapter 5, is to expand the Group of Eight (G-8) to include the BRICs— Brazil, Russia, India, and China— and also South Africa. Unfortunately, thesecountries are wary of joining a club that they view as dominated by the advancedindustrial states. Furthermore, international relations theory does not providemuch guidance about how to reform existing global governance structures.Reform efforts to date are hardly encouraging on this point.16

This logic leads to a concluding and cautiously optimistic note. If policy-makers can clear the hurdle of expanding and adapting the G-8 to address global


13. Goldstein and others (2001, 3); also see Slaughter (2004). 14. Bhagwati (2008). 15. North (1990); Raustiala and Victor (2004). 16. Drezner (2007b); Bradford and Linn (2007).

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warming as an issue area, the chances for success would be quite decent.Because the G-8 tackles a diverse set of issues, the possibility for tactical issuelinkages and cross- issue bargaining increases.17 Global warming, by itself, isa Gordian knot of distributional issues. But if it can be connected to other mat-ters of high and low politics, a grand bargain would be possible.


17. Adding global warming to the G-8 agenda would also address the bureaucratic politicsproblem identified by both Runge and Antholis. Requiring policy principals to address global warm-ing policy elevates the issue beyond environment ministries.

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Reflections on Climate Change and Trade

Let me start with a general comment that is relevant as background to thetheme of this book, and then move on to some of the specifics of the inter-

face between trade, the World Trade Organization, and the environment thatmany of the chapters above have addressed. At the outset, we need to remem-ber that those who work on trade (mostly academics) and those who work onthe environment (mostly activists) have traditionally been at loggerheads fromtime to time.

Why? One important philosophical difference that underlies much of thistension, which I think we tend to forget, is that trade economists are typicallyconsidering and condemning governmental interventions (specifically, protec-tionism, such as the imposition of tariffs and nontariff barriers) mainly ascreating distortions and harming the general welfare. Conversely, environ-mentalists are typically dealing with what are best described as “missingmarkets” (for example, people dump carcinogens into lakes, rivers, and oceansand emit them into the atmosphere, and they do not have to pay for the pollu-tion). Therefore, they see government intervention (for example, the use of pollution- pay taxes or the use of tradable permits) as correcting a distortion. Itis useful to recall this fundamental difference in the experiences and lifestylesof the people on the two sides of the trade- and- environment aisle, because itunderlies and explains, to some extent, the occasional frictions between them.

Of course, trade and the environment are integrally related, and that is whymany disputes were coming up at the General Agreement on Tariffs and Trade(GATT)—the most important being, of course, the celebrated dolphin- tuna casebetween the United States and Mexico. I will return to the important issuesraised by the dolphin- tuna jurisprudence and its later reversal in the shrimp- turtle dispute, also involving the United States. But let us start with the problemsraised by global warming.

In his comment on chapters 5 and 6, Daniel Drezner points out that, in thepast, America has opted for short- run adjustment costs with a view to long- rungain. I do not quite know what he means by “short- run adjustment costs,” but

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I would simply say that an enlightened hegemon like the United States, whengoing in for the GATT, certainly did not insist on the developing countries hav-ing reciprocal obligations. It simply gave away membership. It was, in fact,getting the developing countries into the GATT while gaining nothing in termsof an immediate, reciprocal opening of markets.

I think the intention was to create more legitimacy for the GATT by increas-ing membership. Down the road, then, you would have graduation and beginto “collect”—via what is called extended reciprocity or intergenerational rec-iprocity. There were no short- run costs à la Drezner either. After all, thedeveloping countries at that time, in the mid-1940s, were not important mar-kets anyway; nor were they, by and large, major exporters. They were reallysmall players in world trade, and it was only later, when they had grown, thatthe usual question of reciprocity would become economically relevant.

So one may ask why this argument does not work with the Kyoto Protocolat the moment. Why are we not willing to play that old GATT game? I thinkwe need to look into this question carefully to get a sense of where the prob-lems might be with how we approach the design of the successor pact to Kyoto— what I like to call Kyoto II.

A key problem, of course, is that there are two big players, India and China,with current and prospective emissions of carbon dioxide that are simply largefor India and huge for China. We did not have anything like this at the time theGATT was formed; then, as noted, the developing countries were all little play-ers in trade, for all practical purposes. Exempting India and China from theemission obligations of a climate change treaty today is thus not like exempt-ing the developing countries from trade obligations in the 1940s. Moreover,India and China are not willing to make any payment to get into the Kyoto club,as it were, simply because they feel— and this is where, I think, the real cruxcomes in— that they did not contribute to past environmental damages.

Now, if one looks at the past environmental damages, it is clear that the accu-mulated fossil fuel carbon dioxide for 1850 to 2005 shows the damage attributableto India and China is about 10 percent, whereas the countries now belonging tothe European Union, Russia, and the United States jointly account for over 60percent. So you have basically what I have called a “stock” problem,1 the prob-lem of “past” damage to the environment— for which America and the EU,basically, are particularly responsible. And the solution to this “stock” problemin the Kyoto Protocol, which was devised to bring India and China on board,was to say, “Look, because we were the ones who imposed large losses on theenvironment in the past, and not you, we will exempt you from any ‘flow’ obli-gation for reducing the current damage, no matter how large.”


1. This was in a center- page Financial Times oped article in August 2006.

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Now, the problem is that, in so designing the Kyoto Protocol, its framerswere trying to kill two birds with one stone. And, of course, that stone is notsomething palatable— to mix metaphors— to the U.S. Congress. The U.S. Sen-ate virtually unanimously rejected Kyoto in 1997 because its members thoughtthat India and China were going to be free riders, when in fact the free ride wasbeing provided because they had not been riding for almost a hundred yearswhile America had been! I think that the general feeling instead was that thesecountries were being let off simply because they were developing countries,presumably on a progressive taxation ground; but progressive taxation hasbecome increasingly a hard sell (though the Barack Obama administration maywell restore it to some respectability).

In sum, India and China were not free riders. Rather, their governments weresaying to the Western nations: “Look, you have done a lot of damage. You’vegot this ‘stock’ liability for past emissions. And you cannot just get us to acceptsignificant ‘flow’ liability for current emissions while you do nothing signifi-cant on the stock side.”

Thus, I have always felt that the Kyoto Protocol was doomed, in a way,because it really could not be effective, as designed, until we addressed thisparticular basic issue clearly and directly in a transparent manner— forgoingthe fudge that mixed up the stock and the flow dimensions of the obligations.And I think this problem is going to afflict Kyoto II as well. Frankly, what weare negotiating so far shows little willingness on the part of today’s rich, devel-oped countries to accept the notion that they must pay for past damages; andso it would be little short of ethical nonsense for them to ask India and Chinato accept much larger flow obligations.

Now, this unwillingness to face up to the liability for past carbon emissionsis rather strange, in the sense that the United States has already accepted,2 inits domestic environmental practice, the superfund approach under which, forhazardous waste, liability has been assigned, in eligible industries, for past dam-ages, even when the pollution was not regarded at the time to be harmful.America is a nation that thrives on torts; indeed the Democratic Party does also,and it cannot be denied that America has actually accepted the superfundapproach in its own environmental policy.

So, in my judgment, for us to go around saying that India and China haveto accept obligations on the flow side— which I think is perfectly appropriate— while doing nothing like a substantial superfund for past carbon emissions onthe stock side, is to invite condemnation as a superpower play by nations, boththe EU members and the United States, that are no longer quite the superpow-

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2. I noted this in my 2006 Financial Times article.

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ers that they were once. You really need to walk on two legs and not just onone leg.

I see statements all the time, from even Al Gore and Bill Clinton, about thedesirability of China and India accepting flow obligations. But unless I havemissed something, neither has publicly acknowledged the need for a substan-tial superfund for the U.S. stock liability. So much for their environmentalism: self- serving for the United States, not cosmopolitan and just.

Now, the same problem arises in trade negotiations because India, and sev-eral developing nations, say to America, “How can you have to this day sizable trade- distorting agricultural subsidies, and then expect us to open our agricul-tural sector to competition from such subsidized exports by you?” In fact, theDoha Round multilateral trade talks collapsed in August 2008 precisely becauseIndia claimed that nearly two- thirds of its people were in the farming sector,most were subsistence farmers, and the United States had only 2 million, oftenlarge, farmers with much larger subsidy support. So, India wanted a specialsafeguards mechanism that, in my view, was excessively cautious, citing oursubsidies. Remember, of course, that the United States itself had introducedspecial safeguards against China; and that nothing works better to get protec-tion than to allege, often without any basis, that the exporters are “unfairly”subsidizing exports to us. Yet, when the talks collapsed, the U.S. trade repre-sentative and an obliging media, and Congress in turn, zeroed in on India asthe rejectionist culprit.

So, as one draws analogies between trade and the environment, it is neces-sary to remember that unless America brings to both negotiations, each ofwhich is extremely important, the notion that it cannot just impose what it wantson others, often to its presumed advantage regardless of the others’, it is likelyto meet with failure. Charles Kindleberger famously called the United Statesan “altruistic hegemon.” I fear that it has increasingly tended in recent years tobecome a selfish hegemon.

I should add that it is not just the United States that is a problem. I see lit-tle attention being paid to the stock problem in Europe either. As then–senatorObama said about Senator John McCain: He is a good man; it is just that hedoes not get it. Thus, when I was in Florence recently, and Tony Blair was inthe chair and talking about what he was doing on the environment, KishoreMahbubani, myself, and others from the developing countries drew his atten-tion to the superfund idea. He continued through the session as if he had heardnothing. As then–senator Obama would have said: Prime Minister Blair justdoes not get it. But unless he, Gore, Clinton, and others do get it, do not expectthat Kyoto II can be signed and ratified by India, China, the United States, andEuropean Union.


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Now, let us turn to the problem raised by the notion— fashionable in Con-gress these days— that if India and China do not accept green house emissionsobligations, America would impose a “border tax,” better called an import duty,that is equal to the carbon tax that they are not imposing in sync with Amer-ica’s. This is, of course, like the idea that the French floated against the UnitedStates, saying they would tax American exports to the EU because Americahad not signed the Kyoto Protocol. This issue, of course, takes us back to the tuna- dolphin case in 1991 at the GATT. When tuna- dolphin came up, the envi-ronmentalists were terribly upset that the United States lost the case. At thattime, I happened to be the economic policy adviser to Arthur Dunkel, the director- general of GATT. And so I was consulted by the legal adviser, FriederRoessler, on the ongoing case and what the position of the GATT Secretariatshould be. The focus at the time was whether specific process and productionmethods (PPM) should be allowed to be prescribed for import eligibility— thatis, could the United States specify that tuna should be allowed to be importedonly if purse- seine nets that also caught dolphins were not used?

Coming from the economic side, I felt that PPMs, as a general case, shouldnot be allowed to be so used to regulate the entry of imports because they couldthus be used to discriminate against specific suppliers while appearing to benondiscriminatory. After all, those involved in international trade have all beenbrought up on the famous apocryphal example (based, however, on a real case)of imported cheese being taxed by Germany if it was produced by cows graz-ing at 4,500 feet and above, with bells around them and under Alpine conditions.This was obviously aimed at Swiss cheese, although, in principle, if Tanzaniawere to satisfy the conditions, Tanzanian cheese would be equally subjected tothe same high tariff. The use of the PPM could then defeat the intent of nondis-crimination required by the GATT.

So we were coming at the PPM issue from the trade side, because the GATTwas a trade institution. And we did not really think of the environmental aspectspecifically at that particular point (except that, if the issue fell under ArticleXX, greater leeway was permissible).

Thus the position we took was that the legitimation of a free use of PPMsto regulate imports would open the door to the indiscriminate use of de factodiscrimination in trade among different suppliers, undercutting the basic prin-ciple of nondiscrimination underlying the GATT. Anybody could say the wayyou produce something, no matter how or why, is unacceptable. We could notsee how de facto discrimination could be contained; it could proliferate hugely.

But the shrimp- turtle decision years later, by the Appellate Body of the WorldTrade Organization, basically reversed the dolphin- tuna jurisprudence, ignor-ing our caution. It meant that we would now be opening the floodgates for all

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kinds of PPM prescriptions that would afflict anyone, on any issue (though wehad also argued that the situation would be asymmetrical between weaker andstronger nations because it was unlikely that the weaker nations could take onthe stronger nations in this essentially arbitrary fashion— a worry that has alsobeen expressed by prominent nongovernmental organizations in the develop-ing countries).

I was among the few who thought that this decision was ill judged, reveal-ing the weakness of an Appellate Body where familiarity with legal jurisprudenceand practice is not a requirement for an appointment. Now, I would simply saythat the chickens have come home to roost against the United States itself. TheFrench plan to tax imports from the United States because the United States hadnot signed on to the Kyoto Protocol was exactly the kind of thing I had pre-dicted. And now the United States, which has among the lowest gasoline pricesin the world, absurdly believes that, instead of being subjected to PPM restric-tions itself on grounds of inadequate energy prices, it can put import taxes onsuch PPM grounds against India and China.

And, frankly, what would then prevent India from discriminating againstU.S. exports on the ground that the United States does not have a superfund?I could go on endlessly. This way lies chaos, just as I had argued to Roessler,and to Dunkel, during the dolphin- tuna panel’s deliberations.

I think America needs to be very careful about not going down the route thathas been opened up by the U.S. legislation and the World Trade Organization’sruling in support of it in the shrimp- turtle case. If America goes down that leg-islative route, it is likely to be the loser in the end— certainly on energy and theenvironment. Thus, Congress needs to be told that this is a game everybodycan play.


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Contributors

Joseph E. Aldy is a fellow at Resources for the Future and codirector of theHarvard University Project on International Climate Agreements. His researchfocuses on climate policy, mortality risk valuation, and energy policy. He is alsocodirector of the International Energy Workshop and an adjunct assistant pro-fessor at Georgetown University. From 1997 to 2000, he served on the staff ofthe President’s Council of Economic Advisers, where he was responsible fordomestic and international climate change policy. He participated in bilateral andmultilateral conferences and meetings on climate policy in Argentina, Bolivia,China, France, Germany, Kazakhstan, South Korea, Israel, Mexico, and Uzbek-istan, including the Conference of Parties (COP)-4, COP-5, the Organization forEconomic Cooperation and Development, and the International Energy Agency.He coedited (with Robert Stavins) Architectures for Agreement: AddressingGlobal Climate Change in the Post- Kyoto World (Cambridge University Press,2007).

William Antholis is the managing director of Brookings. He has been a sen-ior adviser on foreign security and economic policy at the National SecurityCouncil and the State Department, and was director of studies at the GermanMarshall Fund of the United States, a U.S. grant- making and public policy insti-tution devoted to strengthening transatlantic cooperation. He has been aninternational affairs fellow of the Council on Foreign Relations and a visiting fel-low at the Center of International Studies at Princeton University. In 1991, hecofounded the Civic Education Project, a nonprofit organization that supports Western- trained social science instructors at universities in nineteen Central andEastern European countries.

Jagdish Bhagwati is university professor at Columbia University and a sen-ior fellow in International Economics at the Council on Foreign Relations. Hehas been economic policy adviser to Arthur Dunkel, director- general of the Gen-eral Agreement on Tariffs and Trade (1991–93), special adviser to the United

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Nations on globalization, and external adviser to the World Trade Organization,where he served on the expert group on the organization’s future. He was on theadvisory committee to UN secretary- general Kofi Annan for the New Partner-ship for Africa’s Development process, and was also a member of the eminentpersons’ group under the chairmanship of President Fernando Henrique Cardosoon the future of the United Nations Conference on Trade and Development. Fivevolumes of his scientific writings and two of his public policy essays have beenpublished by the MIT Press. He has been the recipient of six festschrifts, and hehas also received several prizes and honorary degrees, including awards from thegovernments of India (Padma Vibhushan) and Japan (the Order of the Rising Sunand the Gold and Silver Star). His latest book, In Defense of Globalization(Oxford University Press, 2004), was published to worldwide acclaim.

Jason E. Bordoff is policy director of the Hamilton Project, an economic pol-icy initiative housed at the Brookings Institution committed to promoting morebroadly shared prosperity. He has written on a broad range of economic policymatters, with a focus on climate and energy, trade and globalization, and tax pol-icy. His publications include Path to Prosperity (Brookings Institution Press2008, with Jason Furman) and several journal articles, book chapters, op eds andpolicy papers. He is also a term member of the Council on Foreign Relations andserves on the board of the Association of Marshall Scholars. He is a member ofthe New York and Washington, D.C., bar associations. He previously served asan adviser to Deputy Secretary Stuart E. Eizenstat at the U.S. Treasury Depart-ment, and worked as a consultant for McKinsey & Co. in New York. He graduatedwith honors from Harvard Law School, where he was treasurer and an editor ofthe Harvard Law Review, and clerked on the U.S. Court of Appeals for the D.C.Circuit. He also holds an MLitt degree from Oxford University, where he stud-ied as a Marshall Scholar, and a BA from Brown University.

Nils Axel Braathen is a principal administrator in the Environment Direc-torate of the Organization for Economic Cooperation and Development (OECD),where he has worked since 1996. He is currently working on environmentallyrelated taxes, the valuation of environmental externalities, the environmentaleffects of transport, and a database on instruments used for environmental pol-icy. He has previously done macroeconomic model simulations of environmentalpolicies and researched voluntary approaches to environmental policy, the eco-nomics of waste, and instrument mixes for environmental policy. He holds amaster’s degree in economics from the University of Oslo. Before joining theOECD, he was deputy director- general in the Department for Long- Term Plan-



ning and Policy Analysis of the Norwegian Ministry of Finance and deputy director- general in the Industrial Policy Department of the Norwegian Ministryof Industry. From 1987 to 1989, he was deputy director of the Association ofNorwegian Finance Houses, and from 1981 to 1987, an administrator and thendivision head in the Norwegian Ministry of Industry.

Colin I. Bradford Jr. is a nonresident senior fellow at Brookings and theCentre for International Governance Innovation (CIGI) in Waterloo, Canada. Hewas previously chief economist at the U.S. Agency for International Develop-ment, head of research at the Development Center of the Organization forEconomic Cooperation and Development, a senior staff member of the Strate-gic Planning Unit of the World Bank, research professor of economics andinternational relations at American University, and associate professor of inter-national economics and management at Yale University. His research and expertiseare focused on global poverty, globalization, foreign assistance, international eco-nomics, and international organizations.

Lael Brainard is vice president and founding director of Brookings GlobalEconomy and Development and holds the Bernard L. Schwartz Chair in Inter-national Economics at Brookings. She served as the deputy national economicadviser and chair of the Deputy Secretaries Committee on International Economicsduring the Bill Clinton administration. As the deputy director of the NationalEconomic Council, she helped build a new White House organization to addressglobal economic challenges such as the Asian financial crisis and China’s entryinto the World Trade Organization. Previously, she served as an associate pro-fessor of applied economics in the Sloan School of Management at theMassachusetts Institute of Technology. She is currently a member of the Wes-leyan University Board of Trustees, the Council on Foreign Relations, and theAspen Strategy Group.

Thomas L. Brewer is on the faculty of the McDonough School of Businessat Georgetown University and research director of Climate Strategies. He spe-cializes in issues associated with climate change, including the intersections ofclimate change issues with international trade, technology transfer, and invest-ment issues. He has written or edited numerous books and published articles ina wide range of refereed journals on international business issues, including tradeand investment issues at the World Trade Organization. He has made presenta-tions on climate change issues at the Royal Institute of International Affairs(Chatham House), the European Commission, the European Parliament, the Cen-

Contributors 179


tre for European Policy Studies in Brussels, the Economic and Social ResearchInstitute of the Japanese government, the World Bank, and the International Cen-tre for Trade and Sustainable Development, as well other conferences foracademic, business, and government audiences.

Daniel W. Drezner is professor of international politics at the Fletcher Schoolof Tufts University. He has previously taught at the University of Chicago andthe University of Colorado at Boulder. He is the author of All Politics Is Global:Explaining International Regulatory Regimes (Princeton University Press, 2007),U.S. Trade Policy: Free versus Fair (Council on Foreign Relations Press, 2006),and The Sanctions Paradox: Economic Statecraft and International Relations(Cambridge University Press, 1999). He has published articles in numerous schol-arly journals as well the New York Times, Wall Street Journal, Washington Post,and Foreign Affairs. He has received fellowships from the German MarshallFund of the United States, the Council on Foreign Relations, and Harvard Uni-versity, and he previously held positions with the Civic Education Project, theRAND Corporation, and the U.S. Treasury Department. He is a regular com-mentator for Newsweek International and National Public Radio’s Marketplace.He keeps a daily weblog for Foreign Policy (www.drezner.foreignpolicy.com).His next book, An Unclean Slate, will examine the future of global governance.

Jeffrey A. Frankel is Harpel Professor of Capital Formation and Growth atHarvard University’s John F. Kennedy School of Government. He directs the pro-gram in International Finance and Macroeconomics at the National Bureau ofEconomic Research, where he is also a member of the Business Cycle DatingCommittee, which officially declares recessions. He was appointed to the Coun-cil of Economic Advisers by President Bill Clinton in 1996 and served until 1999,with responsibility for international economics, macroeconomics, and the envi-ronment. He was previously a professor of economics at the University ofCalifornia, Berkeley, having joined the faculty in 1979. His other past appoint-ments include the Federal Reserve Board, Institute for International Economics,International Monetary Fund, and Yale University. His research interests includeinternational finance, currencies, monetary and fiscal policy, commodity prices,regional blocs, and global environmental issues.

(Tom) Hu Tao is professor of Renmin University of China and an affiliated fac-ulty member of College of Business, Oregon State University. He was previouslythe chief economist for the Policy Research Center for Environment and Econ-omy in the Ministry of Environmental Protection of the People’s Republic of



China. He served as the Ministry’s chief expert on trade and the environment atthe Doha Round of World Trade Organization negotiations, and he was also amember of the China Council for International Cooperation on Environment andDevelopment. With educational experience in ecology, environmental econom-ics, and agricultural economics, he specializes in issues related to internationalenvironmental policy, international trade, and globalization and climate change.He has worked on many projects with organizations such as the Asian Develop-ment Bank, World Bank, United Nations Development Program, GlobalEnvironment Facility, International Institute for Sustainable Development, andNorwegian Ministry of the Environment.

Arik Levinson is an associate professor in the Economics Department ofGeorgetown University, where he teaches microeconomics, public finance, andenvironmental economics. Most of his research involves the fields of traditionalpublic finance and environmental economics. His current projects concern expla-nations for the reductions in pollution from U.S. manufacturing, valuations ofair quality using happiness data, environmental Engel curves, and the backward- bending quality supply curve of foster parents. He is also a research associate atthe National Bureau of Economic Research and a coeditor of the Journal of Envi-ronmental Economics and Management.

Muthukumara Mani is a senior environmental economist in the World Bank.His work has focused on trade and climate change, pollution prevention policy,natural resources management, environmental taxes, environmental institutionsand governance, and trade and environment issues. His research has appeared innumerous peer- reviewed journals in the fields of economics, the environment,and political economy, and he has also coauthored several policy research work-ing papers for the World Bank and the International Monetary Fund. Before joiningthe World Bank, he was an economist in the Fiscal Affairs Department of theInternational Monetary Fund, where he was responsible for analyzing the envi-ronmental implications of macroeconomic policies and programs and forintegrating broad environmental considerations in country programs.

Warwick J. McKibbin is a nonresident senior fellow at Brookings and direc-tor of the Centre for Applied Macroeconomic Analysis in the College of Businessand Economics at the Australian National University. He is also a professorialfellow at the Lowy Institute for International Policy in Sydney and president ofMcKibbin Software Group. He is a member of the Board of the Reserve Bankof Australia and a member of the Australian Prime Minister’s Science, Engi-

Contributors 181


neering, and Innovation Council. He recently served as a member of the Aus-tralian Prime Minister’s Taskforce on Uranium Mining Processing and NuclearEnergy. He has been a consultant for many international agencies and govern-ments on issues of macroeconomic policy, international trade and finance,greenhouse policy, global demographic change, and the economic cost of infec-tious diseases.

C. Ford Runge is Distinguished McKnight University Professor of AppliedEconomics and Law and former director of the Center for International Food andAgricultural Policy at the University of Minnesota. He has served on the staff ofthe U.S. House of Representatives Committee on Agriculture. As a Science andDiplomacy Fellow of the American Association for the Advancement of Science,he worked at the U.S. Agency for International Development on food aid andtrade. He spent 1988 as a special assistant to the U.S. ambassador to the GeneralAgreement on Tariffs and Trade in Geneva. In 1988, he was named a member ofthe Council on Foreign Relations in New York, and in 1990 a Fulbright Scholarfor study in Western Europe. His publications include five books and a wide rangeof articles concentrating on trade, agriculture, and natural resources policy, includ-ing Freer Trade, Protected Environment: Balancing Trade Liberalization andEnvironmental Interests (Council on Foreign Relations Press, 1994) and EndingHunger in Our Lifetime: Food Security and Globalization (International FoodPolicy Research Institute, 2003). His article “How Biofuels May Starve the Poor”appeared in the May–June 2007 Foreign Affairs.

Andrew W. Shoyer is a partner in the Washington office of Sidley Austin LLPand chairs the firm’s international trade and dispute resolution practice. He focuseson the implementation and enforcement of international trade and investment agree-ments. Drawing on his experience at the Office of the U.S. Trade Representative(USTR) and the World Trade Organization (WTO), he advises companies, tradeassociations, and governments on the use of WTO and other treaty- based tradeand investment rules to open markets and resolve disputes. He spent seven yearsat the USTR, serving most recently as legal adviser in the U.S. Mission to theWTO in Geneva. He was the principal negotiator for the United States of the rulesimplementing the WTO Dispute Settlement Understanding, and he has briefedand argued numerous WTO cases before dispute settlement panels and the WTOAppellate Body. He is also an adjunct faculty member in international trade pol-icy at the School of Foreign Service of Georgetown University.



Isaac Sorkin is a research assistant for Brookings Global Economy and Devel-opment.

Peter J. Wilcoxen is a nonresident senior fellow at Brookings, an associateprofessor of economics and public administration at the Maxwell School of Syra-cuse University, and the director of the Maxwell School’s Center forEnvironmental Policy and Administration. His principal area of research is theeffect of environmental and energy policies on economic growth, internationaltrade, and the performance of individual industries. He is a coauthor (with DaleW. Jorgenson) of the Jorgenson- Wilcoxen Model, a thirty- five- sector econo-metric general equilibrium model of the U.S. economy. He is also a coauthor(with Warwick J. McKibbin) of G- Cubed, an eight- region, twelve- sector generalequilibrium model of the world economy that has been used to study interna-tional trade and environmental policies. He is currently a member of theEnvironmental Economics Advisory Committee of the U.S. Environmental Pro-tection Agency’s Science Advisory Board, and he was a review editor on the ThirdAssessment Report of the Intergovernmental Panel on Climate Change (Cam-bridge University Press, 2001).

Contributors 183


Adaptation fund, need for, 163Adaptation technologies, 99Agreements: environmental, 142–43; trade,

123, 160, 164; vs. treaties, 129; violationsof, 127. See also General agreement; Mul-tilateral environmental agreements(MEAs)

Agriculture: border tax adjustments for, 14t;carbon content of exports, 11t; effects ofEuropean policies on prices and output,18t; effects of U.S. policies on prices andoutput, 22t; in G- cubed model, 4t; GHG emission- reducing technologies in, 96t;leakage of emissions to, 26; market accessin, developing countries’ demands for, 153,155; sources of global investment in, 101t;U.S. subsidies for, 174

Aldy, J. E., 83Aluminum industry: Annex I countries’

exports to U.S., 40n13; border tax adjust-ments targeting, 77, 81; Chinese exports toU.S., 39; competitiveness concerns for,35n2, 71; effects of carbon pricing on,71n2, 85t; energy consumption in, 9, 23;GHG emissions- reducing technologies in,96t; Kyoto Protocol and, 77; share of U.S.GDP and employment, 40n15

Annex I countries: barriers to technologytransfer, 105, 106t, 112; carbon coalitioncomprising, 25; definition of, 100n21;global investment in, 101, 101t; leakagerates from, 37n3, 38n6; share of globalGHG emissions, 114; U.S. imports from,40, 40n13

Antidumping cases, 80Arctic ice cap, melting of, 134Argentina, Kyoto Protocol and, 135Articles of Confederation, U.S., 141Association of Southeast Asian Nations: Free

Trade Area of, 123; opposition to Commit-tee on Trade and the Environment, 148

Australia: carbon content of goods producedin, 11t; effects of European carbontaxes/BTAs on, 15t–17t; effects of U.S.carbon taxes/BTAs on, 19t–21t; energysources in, 77; in Major Emitters’ Group,124, 158

Bali Action Plan, 110Barba, Ricardo, 149n30Barton, John H., 93n1Bauer, Steffen, 143Biermann, Frank, 143, 151n33, 152n37Bingaman- Specter Bill (S 1766), 2, 72Biofuels: as climate change mitigation tech-

nology, 95t, 97, 102; developing countriesand, 102, 103t, 129; global investment in,102; jatropha- based, 98, 102–03; U.S. sub-sidies of, 78

Blair, Tony, 174Border penalties: appropriate, 81; avoidance

tactics, 38, 88; climate change regime and,131, 163; constructive element in, 131–32;inappropriate, 81–82; independent panelsof experts needed for, 78, 81; intermediate,82; leakage of carbon emissions and, 36,37–38; multilateral guidelines on, need for,78–80; possible application by EU, 73–74;

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possible application by U.S., 72; potentialdisruptive element in, 132; principles fordesigning, 76–78, 80–82; WTO law on, 26,36–37, 41–54, 74–76, 80. See also Bordertax adjustments (BTAs)

Border tax adjustments (BTAs), 1, 71; admin-istrative challenges associated with, 25,38n6, 48, 52; arguments for, 1–2; avoid-ance tactics, 38, 88; benefits vs. costs of,37–41, 59; under cap- and- trade system, 36,38–39, 40, 42, 50, 60; China’s energyintensity and, 14t; competitiveness vs.environmental rationale for, 36, 52n63;complexities of computation of, 23, 45–46;computation of, 9–12; cost to consumers,45n32; effects on carbon emissions, 13–14,15t, 18–19, 19t; effects on currentaccounts, 14–15, 17t, 21t; effects on Euro-pean prices and output, 16–17, 18t; effectson exchange rates, 15, 17t, 21, 21t; effectson GDP, 13, 15t, 18, 19t; effects on interestrates, 14, 16t, 20, 20t; effects on trade bal-ances, 14–15, 16t, 20, 20t; effects on U.S.prices and output, 22, 22t; emissionsallowances and, 86; evaluations of effec-tiveness of, 2–3, 23, 24, 26, 36, 37–38, 52;free allocation of emissions allowances asalternative to, 37, 54; Global Environmen-tal Organization (GEO) and, 145; politicalimpact of, 40–41; and protectionism, riskof, 41, 52, 78; and retaliatory trade wars,risk of, 26, 27, 41, 54, 176; simulations ofeffects of, 12–22; size of carbon coalitionand impact of, 25; targets of, recommenda-tions for, 81; U.S. energy intensity and,14t; WTO law on, 26, 36–37, 41–54,74–76, 80

Boxer, Barbara, 60Boxer- Lieberman- Warner Bill (S 3036), 60,

61, 80n25, 86n8Brainard, Lael, 124n2Brazil: barriers to trade in climate friendly

products, 107t; climate change challengesfor, 129; climate friendly technologies pro-vided by, 102, 103t; at Doha DevelopmentRound, 153; fear of Kyoto- style obliga-tions, 126; in Major Emitters’ Group (E-8),124, 158; tariffs affecting energy efficiencyof buildings in, 105, 106t; in WTO, 123

Brazil- Tyres case, 51, 75BTAs. See Border tax adjustmentsBull, Hedley, 127Bush, George H. W., 130Bush, George W., 124, 130

Campbell, J., 6Canada: and GATT process, 122; in Major

Emitters’ Group, 124, 158; oil sands of, 72;tariffs affecting energy efficiency of build-ings in, 105, 106t; U.S. imports of carbon- intensive products from, 40

Canada- Automobiles case, 47n41, 48Cap- andtrade system, 35; border tax adjust-

ments under, 36, 38–39, 40, 42, 50, 60;carbon tax compared with, 46; EU, 39–40,48, 130; free allocation of emissionsallowances under, 37, 54–58; and interna-tional reserve allowance program, 64–65,86; need to include developing countriesin, 70, 70n1; WTO perspective on, 43–47.See also Emissions trading

Capital flows: in developing countries, 9, 100,101, 101t, 102; in G- cubed model, 8–9;global, 99–100, 100t. See also Currentaccounts; Foreign direct investment (FDI)

Carbon capture and sequestration, 97Carbon content of goods, estimates of, 9–12;

complexities in, 45–46, 71, 81, 81n28; lim-iting to most energy- intensive industries,77–78

Carbon emissions: border tax adjustments(BTAs) based on, 1; developing countries’share of, 114; from domestic activities,2–3; effects of European carbontaxes/BTAs on, 13–14, 15t; effects of U.S.carbon taxes/BTAs on, 18–19, 19t; in non-trading sectors, 84; superfund approach to,173–74. See also Greenhouse gas (GHG)emissions; Leakage of carbon emissions

Carbon- equalization measures, 71, 73–74Carbon- intensive manufacturing industries:

border adjustments and protection of, 40;China’s dependence on, 129; competitive-ness effects on, 35n2, 84; exports to U.S.,countries of origin of, 39, 40; free alloca-tion of emissions allowances and, 45, 54,54n78; limiting carboncontent estimatesto, 77–78; percentage of total U.S. emis-



sions, 38; production in response to carbonprice, 37–38; targets of border penalties,81; U.S. dependence on, 129. See alsoTrade barriers against carbon- intensivegoods; specific industries

Carbon pricing: displacement assistance pro-gram, 59; free allocation of emissionsallowances and, 86, 87; unilateral, simula-tion of effects of, 84–85, 85t

Carbon taxes: addressing climate change with,35; cap- and- trade system compared with,46; common global, 130; consumers’response to, 85; effects on European pricesand output, 16–17, 18t; effects on U.S.prices and output, 21–22, 22t; vs. interna-tional reserve allowance program, 63; andleakage of emissions, 13, 18–19, 71n2;simulations of effects of, 12–22. See alsoBorder tax adjustments (BTAs)

Cartagena Protocol, 143Cement industry: Annex I countries’ exports to

U.S., 40n13; border tax adjustments target-ing, 77, 81; in China, 48; competitivenessconcerns for, 35n2, 71; effects of carbonpricing on, 85t; effects of carbon taxes andBTAs on, 24–25; share of U.S. GDP andemployment, 40n15

Center for International Environmental Law,147

Centre for Global Studies, Victoria, Canada,157

Centre for International Governance Innova-tion, Canada, 157, 159

Centre for Science and the Environment,150–51

Charnovitz, Steven, 52n63, 80n27, 143, 145,154n40

Chemicals: Annex I countries’ exports to U.S.,40n13; border tax adjustments targeting,77, 81; competitiveness concerns for, 35n2,71; effects of carbon pricing on, 71n2, 85t;share of U.S. GDP and employment,40n15

China: barriers to trade in climate friendlyproducts, 107t; carbon content of goodsproduced in, 10, 11t, 12; climate friendlytechnologies produced by, 102, 103t; com-petitiveness concerns of, 27; dependenceon carbon- intensive industries, 129; effects

of European carbon taxes/BTAs on,15t–17t; effects of U.S. carbon taxes/BTAson, 19t–21t; energy demand in, 48; energyefficiency standards of, 27, 80n26; energyintensity of, U.S. BTAs based on, 14t; EUtariffs on compact fluorescent light bulbsfrom, 105–06; exchange rate in, 9; exporttariffs on carbon- intensive products, 27;fear of Kyoto- style obligations, 126; flowobligations of, 173, 174; and GHG emis-sions growth, 38–39, 69, 70, 114, 172;investment in sustainable energy, 102;Kyoto Protocol and, 26, 172–73; in MajorEmitters’ Group (E-8), 124, 158; past envi-ronmental damage attributable to, 172;poverty in, 135; and South- South transfersof climate friendly technologies, 103; U.S.competitiveness concerns regarding, 83;U.S. imports of carbon- intensive productsfrom, 39; U.S. trade policies with, conflictsin, 27

Clean Development Mechanism, 86, 110, 115Clean energy, investment in, 135Climate change: approaching through energy,

156, 159–60; public consensus on, 160;public diplomacy on, 136; tragedy- of- the- commons nature of, 35, 162; unilateral vs.multilateral action on, 79

Climate change mitigation/adaptation: interna-tional technology transfers and, 93; as purepublic good, 162; technologies relevantfor, 94–99, 95t–96t

Climate change policy: border tax adjustments(BTAs) and, 1–2; differences amongnations, 1, 129; market mechanisms for,35. See also Competitiveness effects of cli-mate change policy

Climate change regime: and adaptation fund,163; alternative to, 164–65; analogy toframing of U.S. Constitution, 141; andborder penalties, 131, 163; challenges forinternational negotiations on, 129–32;core group of negotiating nations and,124–25, 157–59; current political environ-ment and, 136, 161–62; developing coun-tries’ opposition to, 148–49, 163;developing countries’ role in, 135,153–54; domestic action and, 127–30; firststeps toward, 137; five “G’s” of, 121; form

Index 187


of, 125–27; graduation path in, 134–36;implementation issues, 149–50; Kyotosuccessor negotiations and, 78, 80; linkingwith trade regime, 145–46; long- termfocus of, 133–34; mechanisms for ensur-ing cooperation in, 79–80, 130–32, 163;need for, 78, 80, 88, 146, 154; oppositionto, 147–49, 163; overcoming oppositionto, 154–55; proposals for, 139, 142–43;purpose of, 141; and risk of “sham gover-nance,” 164; size of governing body and,122–24; technology transfers and negotia-tion of, 111–13; trade regime comparedwith, 124n2, 157, 162; and trade sanc-tions, 131–32, 163; unilateral approachesand risks to, 88; WTO as road map for,121, 123, 125, 126, 127–28, 137, 161. Seealso General Agreement to Reduce Emis-sions (GARE); Global EnvironmentalOrganization (GEO)

Climate friendly technologies, 94–99, 95t–96t,114; barriers to transfers of, 105–06, 106t,107t, 108t; proposals for elimination of tar-iffs on, 106–07

Climate- trade liaison committee, proposal for,112

Clinton, Bill, 174Cobb- Douglas function of goods and services,

6Commission on Sustainable Development

(CSD), 146, 147, 150, 151Committee on Trade and the Environment

(CTE), 141, 148; opposition to, 148, 149;Singapore report of, 141–42

Compact fluorescent light (CFL) bulbs:China’s leadership in producing, 102, 103t,106; developing countries’ barriers to tradein, 107t; developing countries’ needsassessments and, 98; tariffs affecting,105–06, 106t

Competitiveness effects of climate change pol-icy, 24, 35, 71, 83; analysis of magnitudeof, 84–85; border adjustments in responseto, 36, 52n63; China’s concerns, 27;Europe’s concerns, 73; forms of policyresponse to, 71; France’s concerns, 83–84;free allocation of emissions allowancesand, 87; performance standards on imports

and, 87; unilateral approaches to address-ing, risks of, 88; U.S. concerns, 83; U.S.proposals to address, 72, 86–88

Congressional Budget Office (CBO), on freeallocation of emissions allowances, 55

CSD. See Commission on Sustainable Devel-opment

CTE. See Committee on Trade and the Envi-ronment

Current accounts: effects of European carbontaxes/BTAs on, 14–15, 17t; effects of U.S.carbon taxes/BTAs on, 21t

Demailly, D., 71n2Developing countries: appealing to self-

interest of, 136; barriers to trade in climatefriendly products among, 105, 107t; bring-ing into climate change regime, 134–36;capital flows in, 9, 100, 101, 101t, 102; cli-mate friendly technologies produced by,102–03, 103t; concerns about environmen-tal conditionality, 148–49; effects of Euro-pean carbon taxes/BTAs on, 15t–17t;effects of U.S. carbon taxes/BTAs on,19t–21t; equity concerns of, respondingrealistically to, 135–36; fear of Kyoto- styleobligations, 126; and GATT, 172; GlobalEnvironmental Organization (GEO) and,153–54, 155; global trade and, 153; impor-tance for solving climate problem, 135;intellectual property rights in, 115–16; andKyoto Protocol, 123–24, 135, 140; leakageand increased GHG emissions by, 70–71; Lieberman- Warner Bill and, 87–88; marketaccess in exchange for climate commit-ments by, 153; multilateral environmentalagreements (MEAs) and, 150–51; need toinclude in emissions control program, 70,70n1; opposition to climate change regime,148–49, 163; opposition to Committee onTrade and the Environment (CTE), 148,149; response to border penalties, 132;share of GHG emissions, 38–39, 69, 70,114, 135; tariffs affecting energy efficiencyof buildings in, 105, 106t; TechnologyNeeds Assessments of, 98–99; technologytransfers from, 99, 102–03, 104; technol-ogy transfers to, 99, 100t, 109–10;



UNFCCC on obligations of, 1. See alsospecific countries

Development assistance. See Official develop-ment assistance

Doha Development Round, 115, 122, 123,132, 134, 139, 152, 153, 160, 174

Dunkel, Arthur, 175

E-8, 124, 126, 157, 158Eastern Europe and former Soviet Union

(EEFSU): carbon content of goods pro-duced in, 11t, 12; effects of European car-bon tax/BTAs on, 13, 14, 15t; effects ofU.S. carbon taxes/BTAs on, 19t–21t

Emissions allowances: auctioned vs. freelyallocated, 45, 54, 59; border measuresrequiring, 36, 39–40, 42; climate changeregime and, 131; cost to consumers,45n32; international reserve allowanceprogram, 60–65, 71; Lieberman- WarnerBill on, 39, 60–61, 72, 86. See also Cap- andtrade system; Emissions trading; Freeallocation of emissions allowances

Emissions trading: closed vs. open system of,130–31; EU system of, 83–84, 86, 87;Kyoto Protocol and, 140. See also Cap- andtrade system

Emissions trading credits, 86; as motive forjoining climate change regime, 136

Emissions Trading Scheme (ETS), EU, 83–84,86, 87

Employment: auctioning of emissionsallowances and, 59; free allocation ofemissions allowances and, 56, 57, 58; in G- cubed model, 7–8; unilateral carbonpricing and, 84–85, 85t

Energy: approaching climate change through,156, 159–60; clean, investment in, 135;sources of global investment in, 101t

Energy costs: differences in climate policyand, 1; effects of unilateral carbon pricingon, 84; free allocation of emissionsallowances and, 87; leakage of emissionsand, 70; in manufacturing industries, 37n4

Energy efficiency standards, China’s, 27, 80n26Energy efficient technologies, 95t–96t, 97; tar-

iffs as barriers for, 105, 106tEnergy Independence and Security Act of

2007 (U.S.), 72

Environment: broad scope of concept, 156; asglobal public good, 142, 146; labor and,148–49; negotiations on, linking with traderegime, 145–46, 152, 155; superfundapproach to, 173; trade and, 79, 79n24,140–42, 153, 154, 155, 171; WTO andissues of, 49–54, 74–75, 141–42. See alsoClimate change

Environmental Protection Agency: on effec-tiveness of border adjustments, 40; onemissions leakage rates under Lieberman- Warner Bill, 37n3, 38, 38n6

ENV- Linkages, 25Esty, Daniel C., 142, 147n24, 150ETS. See Emissions Trading SchemeEurope: carbon content of goods produced in,

10, 11t; carbon tax in, simulations with andwithout BTAs, 12–17, 14t–18t; competi-tiveness concerns in, 73; effects of U.S.carbon taxes/BTAs on, 19t–21t; energydemand in, 48; and GATT process, 122;investment in sustainable energy in, 102;U.S. imports of carbon- intensive productsfrom, 40. See also European Union; spe-cific countries

European Commission, Environmental Tech-nology Action Plan of, 97

European Union: cap- and- trade system of,39–40, 48, 130; Emissions TradingScheme (ETS) of, 83–84, 86, 87; free allo-cation of emissions allowances in, 56,73–74; and Kyoto Protocol, 123; in MajorEmitters’ Group (E-8), 124, 158; negotia-tions with U.S. on border penalties, needfor, 78; possible penalties against U.S.products, 2, 73, 80, 87; proposals for elimi-nating tariffs on climate friendly goods,106–08; responsibility for past environ-mental damage, 172, 174; tariffs affectingenergy efficiency of buildings in, 105,106t; tariffs on compact fluorescent lightbulbs imported from China, 105–06; andtrade barriers, possible application of,73–74; unilateral emissions reduction pro-posal of, 129n8

Exchange rates: effects of European carbontaxes/BTAs on, 15, 17t; effects of U.S. car-bon taxes/BTAs on, 21, 21t; in G- cubedmodel, 9

Index 189


The Federalist (Madison, Hamilton, and Jay),141

Foreign direct investment (FDI): barriers to,105; regional and bilateral agreements and,111; sources of, 100–02, 101t; and tech-nology transfers, 93, 100, 110, 115

France: competitiveness concerns of, 83–84;and “Kyoto carbon tax” against U.S., pro-posal for, 2, 73, 175, 176; in Major Emit-ters’ Group, 158

Free allocation of emissions allowances: asalternative to border adjustments, 37, 54;benefits vs. costs of, 37, 87; and carbonprice, 86, 87; as cash transfer, 55, 58, 87;and competitiveness effects, 87; cost toconsumers, 56; in EU, 56, 73–74; and leak-age, 57n92, 74; output- based, 56–57,56n91, 57n93; WTO law on, 54–58, 86

Free trade: border adjustments and risk to, 41;climate compared with, 124n2; and envi-ronmental protection, 79, 79n24, 140–42;public consensus on, 160

Fuel prices: effects of European carbontaxes/BTAs on, 16–17, 18t; effects of U.S.carbon taxes/BTAs on, 21, 22t

G-7, and GATT process, 122G-8. See Group of EightG-13, 124, 157G-20, 158Gallagher, Kelly Sims, 108GARE. See General Agreement to Reduce

EmissionsGATT. See General Agreement on Tariffs and

TradeG- cubed model, 3–9; vs. ENV- Linkages

model, 25; simulations of effects of bordertax adjustments (BTAs), 12–22

General agreement: building confidencethrough, 125–26; success of, factorsresponsible for, 127

General Agreement on Tariffs and Trade(GATT): Article I most- favored- nationrequirement of, 47–49; Article II of, 42;Article III of, 42n21, 42n22, 43–47; Arti-cle XI of, 42; Article XX exceptions of,44, 49–54, 62, 63, 64, 74–75, 149, 150,154; Brazil- Tyres case, 51, 75; Canada- Automobiles case, 47n41, 48; distributionof power and creation of, 161; Doha

Round of, 115, 122, 123, 132, 134, 139,152, 153, 160, 174; gradual enlargementof, 123, 157, 162, 172; origins of, 122,125, 139–40, 161, 163; product vs.process and production method (PPM)under, 42n22, 44, 74; purpose of, 122; self- help measures in, 127–28; TokyoRound of, 123; Uruguay Round of, 41,152, 153; US- Gasoline case, 44, 46,46n35, 50, 51, 53, 63; US- Shrimp case,44, 50, 51, 62, 63, 64, 75, 141, 171,175–76; US- Superfund case, 47; US- Tunacase, 64–65, 74, 141, 171, 175; Venezue-lan reformulated gasoline case, 81n28. Seealso World Trade Organization (WTO)

General Agreement to Reduce Emissions(GARE), 126; advantages over Kyoto Pro-tocol, 129n8; domestic legislation and,128, 129–30; doubts about, 161–62; emis-sions trading and, 131; enforcement struc-ture of, 130–31; motives for joining, 136

General Electric, 104GEO. See Global Environmental OrganizationGermany, in Major Emitters’ Group, 158Ghana, technology priorities for, 98Glass industry: barriers to international tech-

nology transfers, 105, 106t; border taxadjustments targeting, 77, 81; in China, 48;competitiveness concerns for, 35, 35n2, 71;effects of carbon pricing on, 85t

Global commons, issues of, 139Global Energy Council, proposal for, 160Global Environmental Facility (GEF), 110,

147Global Environmental Organization (GEO):

analogy to framing of U.S. Constitution,141; decoupling of environmental andtrade issues in, 146; developing coun-tries’ role in, 153–54, 155; dispute reso-lution process in, 154; doubts about,161–62; functions of, 144–45, 150,151n33, 154; funding for, 150; and fund-ing for GHG- reducing projects, 145;implementation issues, 149–50; linkagewith trade negotiations, 152, 155; long- term objective of, 145; models for,152n37; need for, 146, 154; oppositionto, 147–49; overcoming opposition to,154–55; proposals for, 139, 142–43; and



protectionism concerns, 148, 153; andrisk of “sham governance,” 164; structureof, 143–44, 144f; timing and phasing ofimplementation of, 151–52; WTO and,145, 146, 150, 151, 154

Global public goods: environmental issues as,142, 146; hegemonic stability theory on,161

Global warming. See Climate changeGore, Al, 174Greenhouse gas (GHG) emissions: border

adjustments and reduction in, 36, 38–39,52; developing countries and growth in,38–39, 69, 70, 114, 135; in ENV- Linkages model, 25; as global externality,79; international reserve allowance pro-gram and reduction in, 62–63; interna-tional trading of, 130; measurementsunder Lieberman- Warner Bill, 48–49;negotiations to curb, 64; process and pro-duction method (PPM) and, 75; stabiliz-ing concentration levels of, 133–34;technologies contributing to reduction of,95t–96t; temporal flexibility in reductionsof, 49; top contributors to, 124; U.S.leadership in curbing, need for, 59. Seealso Carbon emissions

Greenpeace, 150n31Green tariffs. See Border tax adjustmentsGross domestic product (GDP): effects of

European carbon taxes/BTAs on, 13, 15t;effects of U.S. carbon taxes/BTAs on, 18,19t

Group of Eight (G-8), 157; expanding andadapting to address climate change,164–65

Group of Seven (G-7), and GATT process, 122Group of Thirteen (G-13), 124, 157Group of Twenty (G-20), 158

Hamilton, Alexander, 141Hayashi, F., 5Hazardous waste, superfund approach to, 173Hegemonic stability theory, 161Hidden taxes (taxes occultes), 47Ho, Mun, 71n2Hufbauer, Gary, 80n27

Iceland, energy sources in, 77

Ikenberry, John, 163ILO. See International Labor OrganizationImport penalties, 71. See also Border penaltiesIndependent panels of experts, need for, 78, 81India: barriers to trade in climate friendly

products, 107t; carbon content of goodsproduced in, 11t, 12; climate friendly tech-nologies produced by, 102–03, 103t; DohaRound and, 174; effects of European car-bon taxes/BTAs on, 15t–17t; effects ofU.S. carbon taxes/BTAs on, 19t–21t; fearof Kyoto- style obligations, 126; flow obli-gations of, 173, 174; investment in sustain-able energy in, 102; Kyoto Protocol and,26, 172–73; in Major Emitters’ Group (E-8), 124, 158; multinational firms based in,103–04; past environmental damage attrib-utable to, 172; poverty in, 135; proposalfor eliminating tariffs on climate friendlygoods, 106–08; tariffs affecting energyefficiency of buildings in, 105, 106t;Uruguay Round and, 153; in WTO, 123

Indonesia: climate friendly technologies pro-vided by, 103t; in Major Emitters’ Group,124, 158

Intellectual property rights (IPR), in develop-ing countries, 115–16

Interest rates: effects of European carbontaxes/BTAs on, 14, 16t; effects of U.S. car-bon taxes/BTAs on, 20, 20t

Intergovernmental Panel on Climate Change:and Kyoto Protocol, 123; leakage esti-mates by, 37n3, 71n2, 84; United Nationsand, 126

International Brotherhood of Electrical Work-ers and American Electric Power, 60,78n22, 86

International citizenship, 79International Energy Agency, 114, 159International Environmental Agency, 142International Labor Organization (ILO), 139,

140, 144, 145, 154International regimes: domestic actions and,

128–30; five “G’s” of, 121; graduationpath in, 134–36, 137; long- term focus of,133–34; purpose of, considering indesign, 122; self- help measures in,127–28; size of governing body and,122–24; violations of, 127. See also Cli-

Index 191


mate change regime; Trade regime; spe-cific regimes

International reserve allowance program,60–61, 71; cap- and- trade system and,64–65, 86; Lieberman- Warner Bill on, 39,60–61, 72, 79–80; WTO law and, 62–65

Investment: in clean energy, 135; in G- cubedmodel, 5. See also Foreign direct invest-ment

Iron industry: border tax adjustments target-ing, 77, 81; competitiveness concerns for,35n2, 71; effects of carbon pricing on,71n2, 85t

Ismer, R., 1Italy, in Major Emitters’ Group, 158

Japan: carbon content of goods produced in,10, 11t; command- and- control regulationsin, 48; effects of European carbontaxes/BTAs on, 15t–17t; effects of U.S.carbon taxes/BTAs on, 19t–21t; and GATTprocess, 122; and Kyoto Protocol, 123; inMajor Emitters’ Group (E-8), 124, 158;tariffs affecting energy efficiency of build-ings in, 105, 106t

Jatropha- based biodiesel technology, 98,102–03

Jay, John, 141Jidda global energy summit, 159Joint Implementation projects, 110Juma, Calestous, 147

Kennan, George, 142Kenya, ceramic cookstoves in, 103Kim, Jisun, 80n27Kindleberger, Charles, 174Kopp, R., 1Krasner, Stephen D., 122n1Kyoto Protocol, 140, 142; border penalties by

countries adhering to, 1, 2, 81; CleanDevelopment Mechanism of, 86, 110, 115;criticism of, 140, 172–73; delays in, 123,124; developing countries and, 123–24,135, 140; GARE advantages over, 129n8;GEO and, 145; group of nations involvedin, 123–24; leakage of emissions under,38n6; limits on within- country emissions,77; and multilateral regime on climatechange, 79; national sovereignty challenge

in, 126; short- term focus of, 133; successorto, 78, 80, 172, 174; and trade controls, 76;U.S. and, 26, 126, 130, 140; WTO and, 74,75

L-20, 158Labor: and environmental movement, 148–49.

See also EmploymentLeaders’-level Group of Twenty (L-20), 158Leakage of carbon emissions, 35, 36, 69;

analysis of U.S. pollution regulation andprediction for, 32; border adjustments inresponse to, 36, 37–38; border tax adjust-ments (BTAs) and reduction in, 23, 52;carbon tax and, 13, 18–19, 71n2; and casefor trade controls, 76; channels of, 24, 70;and energy prices, 70; estimates of, 37,37n3, 70–71, 71n2, 84; free allocation ofemissions allowances and, 57n92, 74;Kyoto Protocol and, 38n6; under Lieberman- Warner Bill, estimates of,37n3, 38, 38n6; policy response to, formsof, 71; size of carbon coalition and, 25;world oil markets and, 3

Legalization and World Politics (Goldstein,Kahler, and others), 164

Lehman Brothers, 98Leutwiler Group, 152Lieberman- Warner Bill (S 2191), 2, 72; “com-

parable action” under, 61, 72; consensuson global warming and, 160; and develop-ing countries, 87–88; emissions allowancesunder, 39, 60–61, 72, 86; formula fordetermining allowance requirements under,52–53; and international reserve allowanceprogram, 39, 60–61, 72, 79–80; leakagerates under, estimates of, 37n3, 38, 38n6; long- term focus of, 134; Manager’sAmendment to, 60, 61, 80n25, 86n8;measurement of GHG emissions under,48–49; products named in, 35n2; startingdate for, 80; U.S. history with Kyoto Pro-tocol and, 26

Lockwood, B., 3Lucas, R. E., 5

MACE. See Multilateral Commission on theEnvironment

Madison, James, 141



Mahbubani, Kishore, 174Major Emitters Group (E-8), 124, 126, 157,

158Manager’s Amendment. See Lieberman-

Warner BillMankiw, N. G., 6Manufacturing industries: effects of unilateral

carbon pricing on, 84–85, 85t; energy costsin, 37n4; sources of global investment in,101t. See also Carbon- intensive manufac-turing industries; specific industries

Maritime shipping industry, use of wind powerin, 99

Martin, Paul, 158McCain, John, 174McKibbin, Warwick, 6, 38, 71n2MEAs. See Multilateral environmental agree-

mentsMercosur, 123Mexico: barriers to trade in climate friendly

products, 107t; climate friendly technolo-gies produced by, 102, 103t; in MajorEmitters’ Group, 124, 158; opposition toCommittee on Trade and the Environment,149; tariffs affecting energy efficiency ofbuildings in, 105, 106t

Millennium Challenge, 139Mitigation technologies, 95t–96t, 97–99Montreal Protocol, 75, 76, 88, 143Morgenstern, Richard, 71n2Most- favored- nation status, GATT and, 47–49Multilateral Commission on the Environment

(MACE), 143, 144, 144fMultilateral environmental agreements

(MEAs), 142–43, 147; developing coun-tries’ perceptions of, 150–51; Global Envi-ronmental Organization (GEO) and, 145,150, 152n37, 154

Multilateral regime on climate change. SeeClimate change regime

Multinational firms, and technology transfers,103–04, 111

NAFTA. See North American Free TradeAgreement

National sovereignty, avoiding challenges to,125–26

National treatment, WTO on, 43–47

Negotiations, climate: challenges for, 129–32; EU- U.S., need for, 78; GATT Article XXrequirement for, 64; technology transfersand, 111–13; trade regime negotiationsand, 145–46, 152, 155; UN role in, 126–27

Neuhoff, K., 1Non- Annex I countries: barriers to technology

transfer, 105, 106t, 112; definition of,101n21; global investment in, 100, 101,101t, 102; obligations of, 26; share ofglobal GHG emissions, 114; technologyflows from, 104; U.S. border penalties andimports from, 40, 52

Non- governmental organizations (NGOs):Global Environmental Organization (GEO)and, 150, 154; as source of information onglobal environmental issues, 150; andtrade/environment agenda, 147

Nontariff barriers (NTBs), estimates of, 105North American Commission for Environmen-

tal Cooperation, 143North American Free Trade Agreement

(NAFTA), 123; criticism of, 160; environ-mental side agreement, 143, 152

North- North technology transfers: barriers to,106; need for more attention to, 111

North- South technology transfers, 99, 100t;multilateral institutional emphases of,109–10; tariffs as obstacles to, 105

NTBs. See Nontariff barriers

Obama, Barack, 173, 174Official development assistance (ODA): and

North- South technology and financialflows, 99; relative magnitudes of, 100–01,101t, 102

Oil markets, and leakage of carbon emissions,3

Organization for Economic Cooperation andDevelopment (OECD): carbon content ofgoods produced in, 11t; effects of Euro-pean carbon taxes/BTAs on, 15t–17t;effects of U.S. carbon taxes/BTAs on,19t–21t; and GHG emissions, 70; GlobalEnvironmental Organization (GEO) and,145; International Energy Agency at, 114,159; studies of effects of carbon taxes andBTAs, 24–25

Index 193


Organization of Petroleum Exporting Coun-tries (OPEC), 159; carbon content ofgoods produced in, 11t; effects of Euro-pean carbon taxes/BTAs on, 13, 15t–17t;effects of U.S. carbon taxes/BTAs on,19t–21t

Orszag, Peter, 55Ozawa, Connie, 145

Pacala, Stephen W., 94Paper industry: Annex I countries’ exports to

U.S., 40n13; border tax adjustments target-ing, 77, 81; competitiveness concerns for,35n2, 71; effects of carbon pricing on, 85t;share of U.S. GDP and employment,40n15

Pauwelyn, Joost, 81n28Peterson Institute, 35n2Pizer, W. A., 1, 83Pledge- and- review process, 130Pollution regulations, U.S.: effects on manu-

facturing and imports, 28–32, 29f–31f;superfund approach, 173

Process and production method (PPM): GATTdistinction between product and, 42n22,44, 74; and GHG emissions, 75; trademeasures against, precedents establishing,75–76, 175–76

Protectionism: border adjustments and risk of,41, 52, 78; Global Environmental Organi-zation (GEO) proposal and concerns about,148, 153

Quirion, P., 71n2

Regional and bilateral trade agreements, 123,160; impact on WTO, 164

Reinaud, Julia, 71n2Renewable energy sources, 95t, 97Retaliatory tariffs, WTO rules and, 42Retaliatory trade wars: BTAs and risk for, 26,

27, 41, 54, 176; historical examples of, 80; Lieberman- Warner Bill and risk for, 88;multilateral regime to avoid, 80

Richardson, Elliot, 142Rio de Janeiro Treaty, 133, 151Roessler, Frieder, 175Ruggie, John, 122n1Runge, C. Ford, 142, 143

Russia: in Major Emitters’ Group (E-8), 124,158; U.S. imports of carbon- intensiveproducts from, 40. See also Eastern Europeand former Soviet Union (EEFSU)

S 1766. See Bingaman- Specter BillS 2191. See Lieberman- Warner BillS 3036. See Boxer- Lieberman- Warner BillSachs, J., 6Sampson, Gary P., 142, 152Sarkozy, Nicolas, 73Shaffer, Gregory C., 141n3, 147n25, 148, 149Shih, Jhih- Shyang, 71n2Shrimp- turtle case. See US- Shrimp caseSiemens, 104Smoot Hawley tariff, 80Socolow, Robert H., 97Solar power: developing countries’ barriers to

trade in, 107t; as GHG- reducing technol-ogy, 95t, 97, 98; global investment in, 102

South Africa: barriers to trade in climatefriendly products, 107t; climate friendlytechnologies provided by, 102, 103t; inMajor Emitters’ Group (E-8), 124, 158

Southern African Customs Union, 123South Korea, in Major Emitters’ Group, 158South- North technology transfers, 102–03;

barriers to, 105–06; need for more atten-tion to, 111

South- South technology transfers, 103; barri-ers to, 105, 107t; need for more attentionto, 111

Sovereignty. See National sovereigntySoviet Union. See Eastern Europe and former

Soviet Union (EEFSU); RussiaSteel industry: Annex I countries’ exports to

U.S., 40n13; border tax adjustments tar-geting, 77, 81; in China, 48; competitive-ness concerns for, 35n2, 71; effects ofcarbon pricing on, 71n2, 85t; effects ofcarbon taxes and BTAs on, 24–25; andperformance standards on imports, 87;share of U.S. GDP and employment,40n15

Stern Report on economics of climate change,94, 115

Stiglitz, J., 1Subsidies: agricultural, 174; biofuel, 78; and

border penalties, 82



Sulfur dioxide: content of U.S. imports,29–31, 30f, 31t; content of U.S. manufac-turing, 29, 29f; trading system in U.S., 130

Superfund approach: to carbon emissions,173–74; to hazardous waste, 173

Susskind, Lawrence, 145Suzlon, 103

Tariffs: affecting energy efficiency of build-ings, 105, 106t; as barriers to climate friendly technology transfers, 105–06,106t, 107t; on climate friendly goods, pro-posals for eliminating, 106–07; data on,105; on exports, China and, 27; retaliatory,WTO rules and, 42. See also Border penal-ties; Border tax adjustments (BTAs); Car-bon taxes

Tata, 103–04Taxes occultes (hidden taxes), 47Technologies: climate friendly, 94–99,

95t–96t, 114; use of term, 94Technology transfers: barriers to, 105–08, 106t,

107t, 108t, 115–16; and climate changemitigation/adaptation, 93, 115; from devel-oping countries, 99, 102–03, 104; to devel-oping countries, 99, 100t, 109–10; global,99–100, 100t; Global EnvironmentalOrganization (GEO) and, 151n33; implica-tions for international negotiations on cli-mate change, 111–13; internationalinstitutional frameworks for, 108–11, 109t,111t, 115; multinational firms and, 103–04,111; North- South, 99, 100t, 105, 109–10;shift in paradigms of, 93, 93n1; South- South, 103, 105, 107t, 111; trade andinvestment and, 93, 100, 110, 115

Thailand, ceramic cookstoves in, 103Tocqueville, Alexis de, 127Tokyo Round of GATT, 123Trade, global: and developing countries, 153;

and environment, 79, 79n24, 140–42, 153,154, 155, 171; in G- cubed model, 8;regional and bilateral agreements on, 123,160; and technology transfers, 93, 100,110, 115

Trade balances: effects of European carbontax/BTAs on, 14–15, 16t; effects of U.S.carbon taxes/BTAs on, 20, 20t

Trade barriers against carbon- intensive goods:possible application by EU, 73–74; possi-ble application by U.S., 72, 86–87; prece-dents establishing, 75–76; principles fordesigning, 76–78, 80–82; types of, 71;WTO law on, 74–76. See also Borderpenalties; Carbon taxes; Trade sanctions

Trade controls, 71Trade regime, 122; climate change regime

compared with, 124n2, 157, 162; hardtimes for, 160; linking of environmentalnegotiations with, 145–46, 152, 155. Seealso General Agreement on Tariffs andTrade (GATT); World Trade Organization(WTO)

Trade sanctions, 71; alternatives to, 153; cli-mate change regime and, 131–32, 163;international agreements and legitimacy of,76; in Montreal Protocol, 75, 88

Trade wars: border tax adjustments and riskfor, 26, 27, 41, 54, 176; GATT/WTO sys-tem and prevention of, 128; historicalexamples of, 80; Lieberman- Warner Billand risk for, 88; multilateral regime neededto avoid, 80

Transportation: carbon content of exports,11t; carbon emissions from, 3, 84; effectsof European policies on prices and out-put, 18t; effects of U.S. policies on pricesand output, 22t; in G- cubed model, 4t;GHG emission- reducing technologies,95t, 96t; simulated border tax adjust-ments for, 13, 14t; sources of globalinvestment in, 101t

Treadway, A., 5Treaties, vs. agreements, 129Tuna- dolphin case. See US- Tuna case

UNCTAD. See United Nations Conference onTrade and Development

UNDP. See United Nations Development Pro-gram

UNEP. See United Nations Environment Pro-gram

UNFCCC. See United Nations FrameworkConvention on Climate Change

United Kingdom, in Major Emitters’ Group,158

Index 195


United Nations: environmental activitieswithin, 143; role in climate negotiations,126–27

United Nations Commission on SustainableDevelopment, 146, 147

United Nations Conference on Trade andDevelopment (UNCTAD), 122; WorldInvestment Report of, 105

United Nations Development Program(UNDP), 146, 147, 150

United Nations Environment Program(UNEP), 142, 147; Global EnvironmentalOrganization (GEO) and, 145, 146, 150,152n37

United Nations Framework Convention onClimate Change (UNFCCC): on adapta-tion technologies, 99; on developed vs.developing countries’ obligations, 1;Expert Group on Technology Transfers,109–10; Global Environmental Organiza-tion (GEO) and, 144–45; and Kyoto Proto-col, 123, 140; list of climate friendlytechnologies, 95t–96t, 97, 99; and multilat-eral regime on climate change, 79, 88; and North- South technology and financialflows, 99, 112; Technology Needs Assess-ments by, 98–99; trade considerations in,75; and trade controls, 76–77

United Nations Industrial DevelopmentOrganization, 145

United States: agencies responsible for inter-national environmental policy in, 148;agreement vs. treaty process in, 129; agri-cultural subsidies in, 174; approaches toaddressing climate- competitiveness con-cerns, 72, 86–88; Articles of Confederationof, 141; carbon content of goods producedin, 10, 11t; carbon tax in, simulations withand without BTAs, 17–22, 19t–22t; Cli-mate Change Technology Program of,97–98; competitiveness concerns of, 83;dependence on carbon- intensive industries,129; effects of European carbontaxes/BTAs on, 13, 15t–17t; energydemand in, 48; energy intensity of, simu-lated European BTAs based on, 14t; EUsanctions against, possibility for, 2, 73, 80,87; and GATT, 122, 128, 161, 172; importbarriers by, retaliation in response to, 80;

imports from China, 39; imports of carbon- intensive products, countries of ori-gin of, 39, 40; and international citizen-ship, 79; investment in sustainable energyin, 102; “Kyoto carbon tax” against, pro-posal for, 2, 73, 175, 176; and Kyoto Pro-tocol, 26, 126, 130, 140, 173; leadership incurbing GHG emissions, need for, 59; lim-its on tax credits for hybrid fuel automo-biles, 106; in Major Emitters’ Group (E-8),124, 158; and multilateralism, 139; negoti-ations on border penalties with EU, needfor, 78; pollution regulations in, effects onmanufacturing and imports, 28–32,29f–31f; and post- Kyoto system, 131; pro-posals for eliminating tariffs on climate friendly goods, 106–08; responsibility forpast environmental damage, 172, 173; sul-fur dioxide trading system in, 130; super-fund approach of, 173; tariffs affectingenergy efficiency of buildings in, 105,106t; and trade barriers, possible applica-tion of, 72, 86–87; trade policies withChina, conflicts in, 27; unilateral action onclimate change, role for, 79

Uruguay Round of GATT, 41, 152, 153US- Gasoline case, 44, 46, 46n35, 50, 51, 53,

63US- Shrimp case, 44, 50, 51, 62, 63, 171; criti-

cism from environmentalists, 141; anddesign of trade measures, 76; negotiationsrequirement in, 64; PPM precedent in, 75,175–76

US- Superfund case, 47US- Tuna case, 64–65, 74, 141, 171, 175Uzawa, H., 5

Venezuelan reformulated gasoline case, 81n28Vietnam, technology priorities for, 98Villepin, Dominique de, 2, 73Von Moltke, Konrad, 143

Werksman, Jacob, 93n2Whalley, J., 3Wilcoxen, Peter, 38Wind power: barriers to trade in, 106, 107t,

108t; as GHG- reducing technology, 95t,97, 98; global investment in, 102; maritimeshipping industry and use of, 99



WIPO. See World Intellectual Property Organ-ization

Workers. See EmploymentWorld Bank, 147; carbon programs at, 110;

clean energy fund of, 110; Climate Invest-ment Fund of, 150; Global EnvironmentalOrganization (GEO) and, 150; list of cli-mate friendly technologies, 98; and North- South technology and financial flows, 112

World Customs Organization, 105World economy, G- cubed model of, 3–9World Health Organization, 151World Intellectual Property Organization

(WIPO), 150, 151World Investment Report, 105World Meteorological Organization, 147World Resources Institute, 147World Trade Organization (WTO), 41; Agree-

ment on Subsidies and CountervailingMeasures, 54, 57–58; Appellate Body of,42, 43, 176; climate change regime andrisks for, 132; Committee on Trade andthe Environment (CTE), 141–42, 148,149; and core group of climate changenegotiating nations, 124–25; criticisms of,140, 147; dispute settlement system of, 42,

125, 153–54; efforts to liberalize trade inenvironmental goods, 112, 115; enforce-ment system of, 128; and environmentalconsiderations, 49–54, 74–75, 141–42;Global Environmental Organization(GEO) and, 145, 146, 150, 151, 154;import barriers against carbon- intensivegoods and, 74–76; industrial vs. develop-ing countries’ obligations under, 134;Kyoto Protocol and, 74, 75; legality ofborder penalties under, 26, 36–37, 41–54,74–76, 80; legality of free allocation ofemissions allowances under, 54–58, 86;legality of international reserve allowanceprogram under, 62–65; multilateral envi-ronmental agreements (MEAs) and, 143;national sovereignty preserved in, 125;nondiscrimination provisions of, 43–49;purpose of, 122; reasons to abide by obli-gations to, 79; as road map for climatechange regime, 121, 123, 125, 126,127–28, 137, 161; success of, 121, 122,122n1, 127–28; and technology transfers,110–11, 111t, 112. See also GeneralAgreement on Tariffs and Trade (GATT)

World Wildlife Fund, 147, 150, 150n31

Index 197


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Editors

Lael Brainard and Isaac Sorkin

Brookings Trade Forum 2008 / 2009Brookings Trade Forum 2008 / 2009

For more than a decade, the Brookings

Trade Forum has provided comprehensive

analysis on current and emerging issues of

international trade and macroeconomics.

This timely issue focuses on one of the most pressing policy challenges of our day—

climate change—and its impact on international trade.

New climate change policies are likely to be developed and implemented in the next

few years. It is thus critically important to understand the interaction of international

trade and climate change policies both in terms of the role of border adjustments

in climate change policies and the role of international trade and investment in

facilitating mitigation and adaptation. And as policymakers strive toward a post-

2012 climate change framework, the success of the trading system in building a

relatively successful international institution might provide lessons for the climate

change system.

Contributors: Joseph E. Aldy, Resources for the Future • William Antholis,

Brookings • Jagdish Bhagwati, Columbia University and Council on Foreign Relations

• Jason Bordoff, Brookings • Nils Axel Braathen, OECD • Colin I. Bradford Jr.,

Brookings and Center for International Governance Innovation • Thomas L. Brewer,

Georgetown University • Daniel W. Drezner, Tufts University • Jeffrey A. Frankel,

Harvard University • (Tom) Hu Tao, Renmin University • Arik Levinson, Georgetown

University • Muthukumara Mani, World Bank • Warwick J. McKibbin, Brookings,

Lowy Institute, and Australian National University • C. Ford Runge, University of

Minnesota • Andrew W. Shoyer, Sidley Austin LLP • Peter J. Wilcoxen, Brookings

and Syracuse University

Lael Brainard served as vice president and director of the Brookings Institution’s

Global Economy and Development program, 2006–09. She has been nominated by

President Barack Obama to be under secretary of the U.S. Treasury for international affairs.

Isaac Sorkin is a research assistant for Brookings Global Economy and Development.


BROOKINGS INSTITUTION PRESSWashington, D.C.www.brookings.edu

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Climate Change, Trade, And Competitiveness

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